Doubts linger in wake of OPEC production cuts

Sept. 29, 2016
The Organization of the Petroleum Exporting Countries decided at its recent meeting in Algiers to curb production, reportedly the first time since 2008. 

Offshore staff

VIENNA, Austria– The Organization of the Petroleum Exporting Countries (OPEC) decided at its recent meeting in Algiers to curb production, reportedly the first time since 2008.

The cartel reached an agreement to limit production to between 32.5-33 MMb/d. Reuters said OPEC estimates its current output at 33.23 MMb/d, and quoted Iranian Oil Minister Bijan Zanganesh as saying it decided to decrease production around 700,000 b/d.

Commodities and stock markets rebounded upon the news, with Reuters showing oil prices up nearly 6% yesterday, the day the decision was reached. The Guardian said that the dollar rose to an eight-day high against the yen, and the FTSE 100 index rose to a six-week high.

However, the Wall Street Journal noted that the agreement “wasn’t enough to break crude from the roughly $40-to-$50 range it has traded in for months, but some analysts said any sign of cooperation from the group is bullish for the oil market.”

“The oil industry faced deep cuts in investment and massive layoffs, leading to a potential risk that oil supply may not meet demand in the future, with a detrimental effect on security of supply.

“The conference took into account current market conditions and immediate prospects and concluded that it is not advisable to ignore the potential risk that the present stock overhang may continue to weigh negatively well into the future, with a worsening impact on producers, consumers and the industry,” OPEC said via statement.

Furthermore, OPEC member countries decided to dialogue with non-member producing countries, with the aim to stabilize the market.

Unfortunately, the outlook surrounding the decision is still murky. Details, including production levels for each member country, will be fleshed out in OPEC’s Nov. 30 meeting in Vienna. This has led some analysts and news outlets, including CNBC, the Wall Street Journal, and others, to question the agreement, noting that this lapse in action leaves plenty of time for the deal to derail.

In addition, the Wall Street Journal reported today that already “cracks are showing in the accord’s foundations.”

“In recent months, resurgent Iranian and Libyan output seemed likely to be OPEC’s biggest challenge in reaching a deal,” the outlet reported. “But it was Iraq that almost blocked the agreement Wednesday by objecting to the oil-production data OPEC generally uses to determine how much each country can produce, say people familiar with the matter.

“Iraq says the information, which is compiled by independent analysts, underreports Iraq’s actual output. Relying on that data, Iraqi Oil Minister Jabbar al-Luaibi argued, could lead to Iraq getting a smaller share of the group’s production.”

The Wall Street Journal said that after Wednesday’s surge, on Thursday, West Texas Intermediate crude rose 0.38%, to $47.23 a barrel on the New York Mercantile Exchange. Brent crude rose 0.1%, to $49.29 a barrel on London’s ICE Futures exchange.