A big step forward for OPEC

10:07 | 08/12/2016 Global Economy

The Organization of the Petroleum Exporting Countries (OPEC) has agreed on an oil output cut for the first time since 2008. This decision has been welcomed by a number of oil exporting nations and has made the prices of the “black gold” exceed the level of US$50 per barrel. However, according to analysts, the global oil prices remain unlikely to rise in the time ahead and it will remain a mystery about whether the United States increases its oil production in 2017.

The OPEC's decision on an oil output cut is considered a big step forward to reduce oil redundancies

At a November 30 meeting in Vienna, Austria, OPEC countries reached a historic deal on reducing oil output from the current 33.6 million barrels per day by 32.4 million barrels per day, commencing on the first day of next year. Accordingly, Saudi Arabia will cut 486,000 barrels to 10.1 million barrels per day; Iran will cut 210,000 barrels to 4.4 million barrels per day; and the United Arab Emirates (UAE) will cut 139,000 barrels to 2.9 million barrels per day. Iran was allowed to raise oil production by 3.8 million barrels per day, the same volume as that prior to its sanctions imposed by the international community. Under the deal, Libya and Nigeria are exempt from oil output cuts. Indonesia was the only nation to oppose the agreement and decided to suspend its OPEC membership. Another victory of OPEC was that Russia, the largest oil producer and a non-OPEC nation, pledged its willingness to cut 300,000 barrels per day in 2017 in favour of the OPEC’s deal.

The OPEC’s decision was joyfully welcomed by many petroleum exporters within the organisation, as over the past two years, these countries have fallen victims to the oil price battle between oil tycoons in the Middle East and shale gas producers in the United States. In an effort to win the market share, several oil exporters, headed by Saudi Arabia, boosted oil exploitation seeking to increase the supply and reduce the prices, aiming to “smother” American shale gas production firms, which are becoming a new power in the world energy market...

At a press conference after the meeting in Vienna, Qatar’s Energy Minister and OPEC President Mohammed Al Sada affirmed the OPEC’s decision as a big step forward and a historic moment to help rebalance the market and reduce oil redundancies. According to him, the new deal would work to raise global inflation to a healthier level, including the United States. Kuwait also agreed that the move would put an end to redundancies in oil supply. Immediately, oil and stock markets have responded positively to the OPEC’s decision on oil output cuts. Accordingly, at the end of the November 30 trading session, Brent oil prices for January 2017 increased by US$3.86 to US$50.214 per barrel, while WTI oil prices were up by US$3.66 to US$48.89 per barrel. Meanwhile, Dow Jones Industrial Average index saw a record surge after the reported OPEC deal...

Although appreciating the OPEC’s decision, Saudi Arabia’s Energy Minister Khalid A Al-Falih cautiously noted that the oil market will see a supply-demand balance in 2017. Reducing oil output is yet to be the only solution, he said, adding that the OPEC could maintain its current oil production but measures must be taken to rehabilitate and raise the consumption of crude oil and oil products in markets, particularly the US market.

According to analysts, despite being regarded as a big step forward, the OPEC’s decision is just the consensus inside the organisation, while in fact, it is the issues outside the organization that can really influence the prices of the “black gold” in the long term. The US remains a mystery capable of deciding the future of the oil market. The reality shows that in order to stabilise the oil prices, oil producers both inside and outside the OPEC need to work together and become each other’s partners instead of rivals on the market.

Theo NDO