Global oil market at crossroads
Yesterday’s decision of global oil-producing nations to limit and reduce the volume of production can be to some extent compared with Brexit and Donald Trump winning the US presidential elections. In terms of surprise, it is the first time since 2008, OPEC has been able to resolve its internal differences and reached an agreement on the reduction of it’s output, however the consequences of it’s implementation remain cloudy.
According to the results of yesterday’s summit of OPEC, oil production in the cartel will be reduced by 1.2 million barrels per day, bringing down oil production to 32.5 million barrels from 33.7 million barrels per day. The reduction will take into effect on January 1, 2017 and will last six months. Russia has agreed to cut it’s production by 300,000 barrels per day. According to OPEC, the current average daily oil production is estimated at 33.64 million barrels per day.
The agreed reduction, will unlikely result in a significant increase of global oil prices, as a reduction of 1.2 million barrels, will not be enough to ensure the growth of prices, even if the cost per barrel goes up to $58-59US per barrel, since almost all oil producers have increased their volume of production in recent months, to the maximum figures since 2010.
The growth of global economy, according to the majority of analysts, should become the major driver for the fundamental growth of oil prices for the coming years.
At the same time, even the signing of an agreement does not give guarantee of it’s implementation, as the level of credibility of it’s participants to each other remains low.
In theory, higher oil prices provide more funds to the budgets of oil-producing nations, however in contrast, to production, these prices are less predictable and less controlled. Given that Middle Eastern countries are very sensitive of any increase in the production by their neighbours, then a violation of a quota by one country may result in the beginning of a chain reaction. Taking into account that Libya and Nigeria were not included in the quotas, this means that the reduction will not affect, at least a third of all OPEC.
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The situation is complicated because of the exclusion of Indonesia – the main opponent of any production cuts – from the organization prior to yesterday’s discussion. This means that other countries may lose part of its market share in favor of Indonesia.
From 2000 to 2016, the volume of oil production by OPEC countries in the volumes, stipulated by quotas, lasted for 5 months. In addition, from 2009-2012 the excess of production over quota was more than 3 million barrels per day and 4 million barrels per day in 2007.
Members of OPEC and Russia are aware that the increase of oil prices (US$58-59 per barrel) will result in the influx of the US shale oil, to the EU and Asian markets, which will mean the beginning of a new exhausting war for market share, but at extremely low prices for resources.
Eugene Gerden is an international free-lance writer, based in St. Petersburg, who specializes on writing in the field of mining, metals and rare earth metals. ... <Read more about Eugene Gerden>