Easwaran Kanason

Co - founder of PetroEdge
Last Updated: September 29, 2016
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Business Trends
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For the last two years, OPEC has been an ineffectual tiger. Yesterday, the tiger showed that it still has its fangs, though whether or not it still has bite remains to be seen.

Whenever OPEC met previously, traders always hope that they will come to an agreement to initiate a supply freeze to help bring the oil market back into balance and allow prices to rise again. Each time, the traders have been disappointed, and they know enough to anticipate that disappointment. OPEC has been so preoccupied with the inter-organisation stand-off between Saudi Arabia and Iran which extends to geopolitics and religion that nothing would get done beyond carefully measured words.

Until yesterday. The OPEC informal meeting in Algiers concluded and the cartel has agreement to lower output. The agreement will be to reduce OPEC output from the current 33.4 mb/d to a range of 32.5-33 mb/d. All producers will be expected to make cuts, the largest being from Saudi Arabia, while Iran, Nigeria and Libya will be exempt. The latter two need to recover output from terrorist attacks. Cue, a spike in oil prices and a cautious hope that the oil market will be lifted out of its doldrums. Its a big step forward, a sign that enough of the producers that form OPEC are hurting that they need to push for a freeze.

That Iran and Saudi Arabia could agree on something is something of a minor miracle in itself.


Now, will it hold? OPECs power lies not in the actual amount of product that flows but the theoretical notion that it could control the spigot of oil production. There are many reasons to suspect that this agreement may not hold, which would diminish the potency of this recent achievement.

First of all, this is an informal agreement and OPEC has left it to its November meeting to hash out a plan. So theres no immediate material reduction in OPEC production. Second, even if a plan is implemented in November, there is no guarantee that the members will stick to their quotas. Saudi Arabia claims it will be giving up 350 kb/d of production, but this coincides with its general seasonal reduction in output from summer going into winter. Members like Venezuela and Ecuador have a habit of deliberately exceeding quotas even when formal limits have been agreed. OPEC might be a cooperative force, but they are all still competing with each other. And finally, no deal with non-OPEC producers have been reached; a deal with Russia to curb output would have a far larger impact, so as it stands, Russia is free to choose to pump more and siphon market share from OPEC, while nimble American producers are likely to start up more rigs in anticipation of higher prices.

It is easy to be cynical about the announcement. Recent history has proven that OPEC is not necessarily bound to turn its words into reality. Many traders are likely to say "Cool, but we will  believe it when we see it". We agree. But it is also a step forward for the organisation and if it does manage to follow through on its words. It will be all the better for the whole industry, and for people like you and me.

What do you think? Will OPEC really bite this November? Share your throughts

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