OPEC deal: Will OPEC comply? Who will really benefit?
The OPEC deal is done and the news sent oil prices soaring yesterday. The deal, which is designed to curb record-high global oil inventories, has been mooted as a possibility since last February when prices dropped to their lowest prices in over a decade.
It’s taken almost a year, but the deal is done, overcoming disputes between the cartel’s three biggest producers, Saudi Arabia, Iraq and Iran. The deal, which also includes non-OPEC member Russia, represents the first time in 8 years that OPEC agreed to cut oil production and the first time Russia, one of the largest oil producers outside of the cartel, has agreed to cut production in 15 years.
According to Bloomberg Markets, the impact of the deal on energy commodities was almost immediate with prices skyrocketing as much as 10% yesterday. Share prices of energy companies around the world and currencies of many oil exporters jumped with the news as well.
The deal will see OPEC reduce its daily output by 1.2 million barrels, which fulfills the plan that was outlined back in September in Algiers, cutting production to 32.5 million barrels a day in total. The agreement did exempt Nigeria and Libya however, but gave Iraq its first quotas since the 1990s.
Iraq's agreement to cut production by 0.2 million bpd was largely unexpected being that they had long insisted that they needed higher quotas in order to fund their fight against ISIS.
Saudi Arabia will take on the majority of the cuts, reducing output by 0.5 million barrels per day to 10.06 million bpd while its Gulf Cooporation Council allies - United Arab Emirates, Kuwait, and Qatar - will only cut production by a combined 0.3 million bpd.
Iran, which was the most likely to scupper the deal, will be allowed to raise production to 3.8 million barrels a day. This was a big win for Tehran as they had long been against the deal arguing that they needed to regain market share since Western sanctions were lifted earlier this year.
Will OPEC stick to the deal?
Although oil prices were sent skyrocketing after the deal, some analysts believe it might be best to proceed with caution. As is often the case with OPEC, there is always the chance that members could cheat. So, the question is, what are the chances they stick to the deal?
In a recent interview with CNBC, two oil experts gave their opinions on the matter.
Dennis Gartman, founder and editor of The Gartman Letter, remarked that OPEC, "cheats no matter what happens. They have no choice. And I think that cheating, which has been endemic to OPEC since its inception, will simply continue."
Helima Croft of RBC Capital Markets took issue with Gartman stating, “We remain convinced that OPEC will stick this landing. […] Yes, left to their own devices, OPEC countries will cheat. But, what I think is different this time is that almost all of the OPEC countries are flat out producing."
This is where Russia and other non-OPEC members come in. Saudi Energy Minister Khalid al-Falih has long maintained a stance that OPEC would only consider cuts if others outside of the cartel agreed to cuts as well.
Russia had previously been against cutting production, wishing only to freeze production. However, according to OPEC, non-OPEC members will cut output by 0.6 million barrels per day of which Russia will contribute half.
"Russia will gradually cut output in the first half of 2017 by up to 300,000 barrels per day, on a tight schedule as technical capabilities allow," confirmed Russia Energy Minister Alexander Novak shortly after the deal was announced yesterday.
The focus of the deal now shifts to implementation with the next OPEC meeting on 25 May dedicated to monitoring the deal and potentially extending the deal.
How do U.S. oil producers stand to benefit?
The irony of the whole situation is that U.S. shale stands to benefit from the deal. Back in 2014, Saudi Arabia embarked on its mission to cut higher cost U.S. oil producers out of the market by increasing production to dizzying heights. Now its agreeing to a production cut deal that will likely see prices rise to a level that will entice U.S. producers to turn that taps back on.
The oil price rally in response to the OPEC deal may be stopped short if prices do indeed rise to levels that encourage U.S. producers increase production. The scenario played out similarly back in September when oil prices rose after the announcement of the planned deal. U.S. producers quickly put rigs back in operation sending prices right back down to where they were before the announcement.
“We could easily see another 100 rigs in the next 12 months in the Permian Basin,” said Scott Sheffield of Pioneer Natural Resources Co. “By the end of next year we could easily be back up over 9 million barrels a day” of U.S. oil output.
Instead of a gradual recovery in oil prices, it would be a good bet that the oil price roller coaster that we have seen throughout 2016 will continue in 2017, as U.S. producers reenter the market. However, it is anyone’s guess exactly how it will go.
Luckily for you, FocusEconomics produces up to 5-year consensus forecasts for energy commodities. Stay tuned for our next FocusEconomics Consensus Forecast Commodities report that comes out next week, which will have new forecasts for Brent Crude Oil and WTI Crude Oil.
There will also be other developments in commodities, which will be included in the report, such as our latest forecasts for industrial metals in the aftermath of the U.S. presidential election as Donald Trump’s infrastructure plan drives up metals prices.
In the meantime, you can have a look at our Middle East and North Africa regional summary, which has new consensus forecasts for growth in the region in the wake of the deal. You can also download a free sample of our FocusEconomics Consensus Forecast Commodities report by clicking on the button below.
5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.
Date: December 1, 2016
TagsNordic EconomiesEuropean UnionBrexitGermanyEuro AreaBanking SectorBrazilJapanTurkeyUnemployment rateCanadaEastern EuropeIndiaCryptocurrencyEurozoneprecious metalsUnited StatesAustraliaItalyCommoditiesOPECVenezuelaGoldIranFranceArgentinaInfographicExchange RateUKRussiaEmerging MarketsChinaVietnamBase Metals CommoditiesSouth AfricaForexBitcoinHousing MarketSpainTradeOilConsensus ForecastGreeceSub-Saharan AfricaUSAAsiaEconomic DebtColombiaCompany NewsMENATPPMajor EconomiesIMFEnergy CommoditiesEconomic Growth (GDP)PortugalUkraineoil pricesG7MexicoInvestmentHealthcareInflationLatin AmericaAfricaUnited KingdomTunisiaAgricultural CommoditiesPrecious Metals Commodities
Costa Rican GDP is forecast to grow 2.8% in 2019 and 2.8% again in 2020. Read more: https://t.co/q16b5EQF4o
12 hours ago
Central America: Despite ebbing U.S. momentum, the strong U.S. labor market should continue to support remittances… https://t.co/sU8LYPh1Cp
14 hours ago
Congratulations to the top forecasters for Asia-Pacific countries in 2018. We've just announced the winners of the… https://t.co/PgojWwtVGv
15 hours ago
15 hours ago
FocusEconomics analysts project Brazilian growth of 1.8% this year, which is down 0.3 percentage points from last m… https://t.co/lrrjMFnv8o
16 hours ago
- Which will be the most miserable economies in 2019?
- Only by freeing Nigeria from its dependence on oil can Buhari truly take Africa’s giant to the next level
- An Analysis of President Trump’s 2020 Budget
- The World's Fastest Growing Economies
- President Sebastian Piñera aims to bring his elder brother’s private pension system into the 21st century
- Brexit Scenarios: Consensus of 14 Economic Analysts
- Sweden just formed a new government and approved its 2019 budget: what does it mean for the economy?
- Which countries have the highest public debt levels?
- Predictions for the global economy in 2019 from 13 experts
- Gurdgiev: Predictions for the global economy in 2019
- Daniel Lacalle's ideas for 2019: Change of cycle.
- Vietnam Poised to Profit from Free Trade Agreement Opportunities
- Canada in 2019: Interview with a Top Economic Forecaster
- Pound Sterling 2019 Exchange Rate: Projections from Leading Analysts
- Expectations for Latin America’s Economy in 2019
- Ethiopia and Rwanda: From Destruction to Development
- Key commodities trends to look out for in 2019
- What drove Gulf neighbors to bail out Bahrain?
- The Four Financial Bubbles and Their Impact on the U.S. Economy
- The Poorest Countries in the World
- Italy: The sick man of Europe
- What does Bolsonaro's presidential win mean for Brazil's economic outlook?
- The World's Top 10 Largest Economies
- In Latin America, taxpayers are tapped to shoulder the burden of a bank bailout
- How and when will the next financial crisis happen? - 26 experts weigh in
- China and Africa: A partnership under the spotlight
- The conditions are ripe for a Global Financial Crisis 2.0
- Uncertainty, instability and fear haunt a generation of Argentinians
- 5 things: What to expect for Mexico's economy in 2019
- 5 things: Brazil's economic downturn and what to expect going forward
- Emerging Market Currency Crisis: Everything you need to know
- Which ASEAN countries are most exposed in the event of a U.S.-China trade war?
- 75 Top Economics Influencers to Follow
- Emerging Markets Economic Outlook 2018 and 2019
- The Faces Behind Latin America’s Key Institutions
- 2019 Economic Outlook for the Top Oil Producing Countries
- Is your cup of coffee about to get more expensive going in to 2019?
- The Economic Implications of an Aging Global Population
- Can the Wisdom of the Crowds predict the results of the 2018 World Cup?
- Railway Mania: The Largest Speculative Bubble You’ve Never Heard Of
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Investment looks to Latin America, but forecasts are not encouraging
- Turkey: Erdogan has cemented his grip on power - now what about the economy?
- How can Latin America’s business environment benefit from technological change?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Venezuela's Electoral Conundrum
- Gold: The Most Precious of Metals (Part 3)
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- 4 Key European Elections That Will Impact the Economy in 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- Russian economy update in wake of OPEC deal announcement
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit