OPEC creates milestone by deciding to limit oil prices from January 2017

OPEC will now meet non-cartel members on December 9 to convince them that they should do the same.

In a historical development, the world’s largest oil exporters have agreed on a cut to their oil production for the first time in eight years. This could, to some extent, erode the global oversupply which has halved the value crude oil prices due to its continuing persistence in the commodities market for two years.

The Organization of the Petroleum Exporting Countries (OPEC) stated that it has agreed to limit crude oil production to a maximum of 32.5million barrels per day effective from January 1 2017. However this limited production will be applicable only for six months. Currently global oil production stands at 33.64 bpd.

The breakthrough in limiting oil production came about when Saudi Arabia, OPEC’s largest producer, agreed to cut its lion’s share, thus prodding other members, including Iraq, which had initially refused to freeze its outputs, to limit its production as well.

However, Nigeria, Libya and Iran are still fighting to regain their respective market share lost due to imposing of international sanctions / civil unrest / violence.

OPEC will now meet its non-cartel counterparts to discuss cuts in their oil production on December 9.

With this news hitting the market, crude oil prices surged by more than 10% to over $50 a barrel, its highest in a month.

 

Impact on oil market – Analysts’ perspective

The following are reactions from analysts following this bold move:

  • Gareth Lewis Davies, Commodities Strategist at BNP PARIBAS

“The question that was avoided was to what extent is OPEC’s commitment to cut dependent on the … 600,000 bpd (of cuts) from non-OPEC. We remain rather cautious over whether this is a cut from current levels for a cut from proposed levels for 2017and, as a consequence, would not be real cuts.”

  • HAMZA KHAN, HEAD OF COMMODITIES STRATEGY, ING

“OPEC says all of the members have taken Indonesia’s level upon themselves but they haven’t. Does that mean the effective cut is 700,000 bpd? If you look at the numbers, are they adding up? That’s what we’re trying to figure out.”

“We haven’t heard from the non-OPEC members and we don’t know where the other 300,000 bpd will come from (aside from the 300,000 bpd which OPEC says Russia has committed to). It’s a little bit strange for us.”

“The last two years have been full of atypical meetings but this one was unusual. They basically talked themselves into a corner; everyone started saying OPEC will cease to be a viable organisation if they don’t say anything, so they had to say something but it’s unclear what it means.”

  • GOLDMAN SACHS

“While the inclusion of non-OPEC producers makes this a bigger headline cut than was announced in Algiers, we believe that the catalysts for a further rally in prices will need to come from confirmation of participation by non-OPEC producers, evidence of compliance by OPEC producers and more clarity on what Iran has agreed to do given conflicting numbers in the official agreement.”

“We reiterate our view that this is a short duration cut, targeting excess inventories and not high oil prices, which would instead unleash a sharp production response both in the U.S. and in the rest of the world.”

  • PAUL HORSNELL, HEAD OF COMMODITIES RESEARCH, STANDARD CHARTERED

“If you compare it with the case of if there hadn’t been an agreement, quite clearly, it’s probably at the upper end of the expectations of what was going to be possible at this particular meeting. And all in all, one of OPEC’s better days.”

“It doesn’t say (the cuts are) contingent on non-OPEC. It says it’s reached an understanding with key non-OPEC producers, but clearly what’s involved in there is non-OPEC is supposed to do its bit. It’s in nobody’s interest here to be seen as collapsing this … For what it is at the moment, it looks pretty credible.”

  • MIHIR KAPADIA, CEO AND FOUNDER OF SUN GLOBAL INVESTMENTS

“As expected, OPEC is also very keen for non-OPEC members to make a contribution of a 600K barrel reduction for the benefit of the oil industry. This is something that has to be respected and hopefully adhered to by the non-members as it is for the largest benefit of all – something which cannot be burdened just on OPEC. We expect oil prices to be on course towards $55 very soon which has been our forecast for end-2016 since February when it was trading at $28 per barrel.”

  • CARSTEN FRITSCH, COMMODITY ANALYST, COMMERZBANK

“It’s clear that OPEC is speaking with one voice. Non-OPEC is not very important anymore … If the OPEC cuts are implemented, it means there will be a deficit in early 2017 as the call on OPEC oil is 33.1 million barrels per day, according to the IEA.”

  • ANTHONY STARKEY, MANAGER ENERGY ANALYSIS, PLATTS ANALYTICS

“This is a drastic shift in policy for OPEC, whose key members have argued about retaining market share being more important than supporting higher oil prices. This cut is obviously going to reduce their percentage of global market share relative to non-OPEC, especially when you shift Indonesia from the OPEC column to the non-OPEC column.”

  • MACQUARIE CAPITAL

“The OPEC agreement meets or beats the criteria we were looking for in terms of size, tenor, and quality. Winners include (1) OPEC members in the short-term; (2) US E&Ps, (3) Simple refiners, and the (4) Petrochemical sector. Losers include (1) over the ST, complex refiners and (2) US natural gas prices given a likely resumption of meaningful associated gas growth. The rally in drillers and offshore is a false positive in our view and has created a good selling opportunity.”

  • VIKTOR NOSSEK, DIRECTOR OF RESEARCH, WISDOMTREE

“The price of oil has surged today as OPEC finally acted to reduce production, implementing its first cut in eight years. However, while prices may climb further in the very near-term, we expect any gains will be short-lived, with US production likely to ramp up to exploit higher prices.

Put simply, OPEC has not solved the supply glut, and indeed this merely shows how much Saudi Arabia’s position has weakened when it comes to its role as the price maker in oil markets. With a more stable supply side situation now the norm thanks to US shale production, any further upside for the oil price from current levels is unlikely to be sustainable, but that does not mean there will not be a spike in volatility around the price.”

  • ANDY BROGAN, GLOBAL OIL & GAS TRANSACTIONS LEADER, E&Y

“OPEC’s decision to set up an independent governance committee shows a new focus on discipline. That approach gives me more confidence that we’ll see OPEC members abide by the agreement made today. We won’t know the real impact on the market until those production cuts are made, however. Until then, as with decisions made at past meetings, we expect to see short-term market gyration.”

  • CLEMENT THIBAULT, SENIOR EDITOR, INVESTING.COM

“This deal won’t solve the global oil glut in the very short term. And there are still quite a few wildcards that might trigger the cancellation of this deal at any time – including Russia and other non-OPEC countries, as well as the necessity for specific measures that would monitor and guarantee the production cuts.”

  • TORBJØRN KJUS, OIL MARKET ANALYST, DNB BANK ASA

“The OPEC communique specifies the cuts per country. This was very positive for the oil price and makes the agreement strong. There will be a monitoring committee that will follow up on the promised cuts by country. This was also very positive. The deal was also made stronger by the OPEC president’s statement that secondary sources will be used to monitor the cuts. This means the published numbers will be more trustworthy.”

“If demand is weak and even falling, you do not give away market share to others, like you would do when the root-cause for the price weakness instead is coming from the supply side, which is the story now. This is why we think compliance might be weaker this time than in 2001-02 and in 2008-09.”

  • ROB THUMMEL, MANAGING DIRECTOR AND PORTFOLIO MANAGER, TORTOISE CAPITAL

“We feel OPEC’s announcement sets the table for the energy sector bringing stability to oil prices, and OPEC is relevant again but its compliance with the new stated production quota is key to bringing global inventory levels back in-line with historical levels. Despite OPEC’s production cut, OPEC’s spare capacity remains tight; therefore, low cost U.S. oil production is expected to be a critical supplier as future demand for crude oil rises.”

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