Posted November 29, 2016 Ashley Chadwick
All eyes will be on Vienna tomorrow, as OPEC have their meeting to determine whether a deal on production cuts and freezes can be reached.
In Algiers at the end of September, OPEC announced that a deal had been reached and the terms of the deal would be finalised and released at their meeting this week. Over the course of the last month and a half, the price of Oil has generally been slipping as hopes for a deal based on OPEC comments had decreased.
In the last month, all OPEC members, as well as Russia have increased their output, in an attempt to give them a stronger position during the negotiations. OPEC are now producing approximately 34 million barrels per day. Which means significant cuts will be needed if it is to rein in production to under 33 million.
Naturally there are a number of issues that will need to be sorted. Most importantly, how output is measured needs to be decided. The problem being, member states do not all release their production numbers and when they do, they are hardly considered trustworthy. With secondary sources reporting Oil output levels regularly lower than what nations state. Again indicating a willingness to cheat to improve their standing ahead of the meeting and the general distrust amidst members.
Then of course, where the burden of the cuts fall will be the main stumbling block. It seems likely, that Saudi Arabia and its Gulf partners are likely to have to cut the most. Nigeria and Libya will be exempt from any cuts and will likely continue to increase output. Iran and Iraq seem less likely to play ball and most other nations are relatively small producers, so will have limited impact on Oil price. Therefore, Kuwait, UAE and the Saudis will have to do most of the cutting. Recent comments from Iran today, indicate that they will not cut, but could freeze. In response to this, it is alleged that Saudi Arabia are prepared to reject any deal in which Iran and Iraq do not cut, although they will settle for smaller cuts for them than to other countries.
America may seek to take advantage of any OPEC action. There is strong correlation between the Oil price and US rig count. So if price rises on OPEC action, expect to see the rig count to pick up in the US and drag price a little lower. Not to mention any plans that President Elect Trump may have, some of his policies may be a boon to American Oil producers.
Whilst announcing that a deal has been reached will lead to a rally in Oil prices, this will prove to only be temporary if evidence of cuts is not seen. Even if we see cuts, there are no guarantee that they will be ‘honest cuts’, Saudi Arabia normally sees winter production fall by 300K barrels a day compared to Summer highs, so production normally drops at this point in the year. However, Saudi Arabia will not cut unilaterally, they have done so before and they have lost market share. Furthermore, they have already made changes to their economy that is lessening their dependence on Oil, so they need a deal less than they did previously. They will be looking for non OPEC countries such as Russia to also join in freezes or cuts. If a strong deal is done, it is possible to imagine Oil reaching $60 by the end of the year. Yet, at best it seems a tentative will be done they will do little more than support prices no higher than $50. If they fail to make any deal Oil price will tumble below $40 and it will further undermine OPEC’s ability to work cohesively and take any action in the future. Therefore a deal does seem likely, however, it may be a weak deal that does little more than save face rather than a far reaching one that will outline cuts and freezes for all members.