Organization of Petroleum Exporting Countries’ (OPEC) 175th meeting on Friday, December 7th concluded with OPEC+ countries reaching a deal to cut oil production. The global oil market in the last two months has experienced an unprecedented near rock bottom prices ever since the financial crisis of 2008 due to the sharp emerging supply glut. The production cut will be measured against a baseline of October, which would come into effect from January 2019. It would reduce the supply of about 1.2 million barrels per day (bpd) for the first half of next year with an objective to stabilize the global oil market. Of the 1.2 million barrels, 15 OPEC member countries would jointly reduce their production by 800,000 bpd and Russia along with allied members will jointly reduce their production by 400,000 bpd. However, three of the OPEC member countries, Libya, Iran and Venezuela, have been exempted from production cut agreement. Although the real reasons for the exemption is not really known, it is believed that[1] since all the three countries are going through a difficult period in 2018 with Iran and Venezuela facing U.S. sanctions over the nuclear deal and the destruction of democracy and human rights violations respectively whilst Libya has been facing production outages, hence they could be exempted from production cut.
What lies ahead?
With the decision to cut production beginning January next month, experts believe that this will improve the fundamentals of the global oil market and demand would be the driving factor in trading oil resulting in a much needed equilibrium in demand and supply. Ann-Louise Hittle of Wood Mackenzie said that the volume cuts would help tighten the market by the second half of 2019[3] whilst Roger Diwan of IHS Markit claims that the prices of the Brent crude would ascend slowly within two months’ time to 70 USD[4]. However, some analysts argue[5] that bigger cut on the production volume was required to achieve the desired level of 70 USD, whilst Cantor Fitzgerald Europe stated that the current deal would only stabilize the price at $60-$65[6].
It will be about time to understand how much real impact would the volume cut make given the fact that U.S. shale output is continuing to rise at an explosive rate[7] and Iran being given waiver to export oil for a certain period of time to eight of its buyers[8] and the slowing demand of the global economy[9]. However, it is for certain that it would be a tough challenge for an organization like OPEC to control the oil market as U.S. continues to gain control through massive volumes of shale oil production with American oil now accounting to one in ten barrels of total world crude production[10].
OPEC has scheduled a meeting on April 2019 that coincides with the time to renew waivers provided by the U.S. to Iran to export oil to certain Asian buyers over the sanctions that it had earlier imposed.
References:
- “Libya, Iran, Venezuela Secure OPEC Production Cut Exemptions.” December 7, 2018. Oilprice.com. https://oilprice.com/Latest-Energy-News/World-News/Libya-Iran-Venezuela-Secure-OPEC-Production-Cut-Exemptions.html
- “Brent Oil Futures Historical Data”. Investing.com.https://www.investing.com/commodities/brent-oil-historical-data
- “ Opec agrees to cut output by 1.2m barrels a day”. December 8, 2018. Financial Times. https://www.ft.com/content/490597a8-fa28-11e8-8b7c-6fa24bd5409c
- “Removing 1.3M Barrels a Day Will Put Solid Floor Under Prices, Says IHS Markit. December December 7, 2018. Bloomberg. https://www.bloomberg.com/news/videos/2018-12-07/removing-1-3m-barrels-a-day-will-put-solid-floor-under-prices-says-ihs-s-diwan-video
- “ANALYST VIEW-OPEC, allied exporters to cut crude output by 1.2 mln bpd”. December 8, 2018. ET Energy World. https://energy.economictimes.indiatimes.com/news/oil-and-gas/analyst-view-opec-allied-exporters-to-cut-crude-output-by-1-2-mln-bpd/66996567
- “ANALYST VIEW-OPEC, allied exporters to cut crude output by 1.2 mln bpd”. December 8, 2018. ET Energy World. https://energy.economictimes.indiatimes.com/news/oil-and-gas/analyst-view-opec-allied-exporters-to-cut-crude-output-by-1-2-mln-bpd/66996567
- “3 American Oil Charts Before Christmas 2018”. December 9 , 2018. Forbes. https://www.forbes.com/sites/judeclemente/2018/12/09/3-american-oil-charts-before-christmas-2018/#7cd612f51a6e
- “Saudi Arabia Juggles Iran and U.S. Shale to Deliver OPEC Deal”. December 8, 2018. Bloomberg. https://www.bloomberg.com/news/articles/2018-12-07/saudi-arabia-juggles-iran-and-u-s-shale-to-deliver-opec-deal
- “Goldman Sachs and Morgan Stanley Warn Oil Uncertainty to Persist”. December 10, 2018. Bloomberg. https://www.bloomberg.com/news/articles/2018-12-10/goldman-sachs-and-morgan-stanley-warn-oil-uncertainty-to-persist
- “Oil prices recover as Opec and allies agree to cut output”. The Guardian. December 7, 2018. https://www.theguardian.com/business/2018/dec/07/oil-prices-recover-as-opec-and-allies-agree-to-cut-output
