OPEC deal: Will OPEC comply? Who will really benefit?

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. 

Azerbaijan and Kazakhstan, also non-OPEC members, have said they may join in on the output cuts. OPEC will hold talks with non-OPEC members on 9 December.

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.

Sample Report

5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.

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Date: December 1, 2016


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