Dec 02, 2016 03:49 PM IST | Source:

Crude oil may surge as OPEC on strong ground

OPEC decided to cut production by 1.2 million barrels a day from January 2017 to 33.6 million barrels per day.

Ravindra. V. Rao
Anand Rathi Commodities

WTI oil rallied the most in nine months as OPEC, once a mighty block, on 30th November at Vienna approved a cut in production for the first time in eight years to curtail the global glut. OPEC decided to cut production by 1.2 million barrels a day from January 2017 to 33.6 million barrels per day. The agreement exempted Nigeria and Libya. Another positive move came from non-OPEC Russia, which changed its stance from freezing production at current record-high levels to production cuts depending on technical challenges. OPEC wanted non-OPEC countries to cut production by 600,000 barrels per day. The immediate impact was felt on WTI, which surged to near $50, and is now facing stiff resistance near $51.50–52. The focus would now shift to the even-more-important execution.

The week was very hectic in Vienna as OPEC members came together to discuss matters supporting global oil-price stability. Market was volatile as tiffs among Saudi Arabia, Iran and Iraq intensified. The game of market share further intensified when Saudi said it would not cut production if Iran and Iraq did not, and that OPEC need not cut production to stabilise prices.

In a double blow, when OPEC’s technical committee approached Russia for discussions even before the meet in Vienna, Russia said it would be ready to talk any day with OPEC once it reached consensus. These comments came two days after Saudi Arabia decided not to attend the meeting with non-OPEC countries. But, it appears that OPEC’s last-minute diplomatic push has been successful.

For Saudi and Iran it was a win-win at Vienna. After weeks of often tense negotiations, the eventual alignment of OPEC’s biggest producers points to the increasing dominance of Iran among the group’s top ranks. It’s allowed to raise output to about 3.8 million barrels per day, a victory for a country that’s long sought special treatment as it recovers from sanctions. Saudi Arabia previously proposed that its regional rival limit output to 3.707 million barrels per day. The largest oil-producing country, which raised production to a record this year, will reduce output by 486,000 barrels per day to 10.058 million, an OPEC document shows. Iraq, OPEC’s second-largest producer, agreed to cut 210,000 barrels per day from October levels. The country had previously pushed for special consideration, citing the urgency of its offensive against the Islamic State.

This step taken by the 14-member group to curb the supply glut will be positive for international prices. OPEC is scheduled to meet again on 25th May in Vienna to further decide direction for H2 2017. Now, it will meet non-OPEC countries at Doha next week to seek support for a similar deal. Simultaneously, the price rise would benefit U.S. shale-oil producers, providing incentives to ramp up production, a move that might cap any oil-market rally. The question still remains regarding the long-term impact of the deal and the ability of OPEC to execute the cuts. Members of OPEC have a history of not complying with such agreements; countries produce more than the agreed-upon levels. OPEC said it is aiming at prices as high as $55 to $60 a barrel, a level that would boost petroleum-dependent economies badly damaged by two years of prices often below $50, and provide some relief to energy companies battered by the price drop. Above $52, there are chances of oil rallying to $60 but that would encourage US shale-oil producers to pump more. Therefore, in the first half of next year, an oil cap would probably be found near $60.
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