OPEC’s decision: implications for oil
OPEC members decided to cut production for the first time since 2008. The plan is to reduce output by 700K a day to 32.5-33M barrels a day. The measure is aimed to help oil prices stabilize and strengthen. The organization aims to reveal more details about the deal at its next policy meeting on November 30. The agreement was possible because Iran will be exempt from capping production – a concession made by Saudi Arabia.
At first the news may seem to be a game changer – the market was looking forward for a production freeze at best and got more than that – a cut. The deal marks a new stage of relationship between Saudi Arabia and Iran, who were caught in hard economic and political confrontation during the past years. The market’s faith in OPEC will increase.
However, once you try to analyze the situation, you understand that there are still many challenges ahead. To begin with, OPEC nations have to choose how the cut will be allocated between members. This likely won’t be an easy process. In addition, OPEC will have to reach an agreement with non-OPEC oil producers – another difficult task.
As a result, many analysts are rather skeptical. Goldman Sachs says that new quotas could add $7-$10 a barrel to oil prices in the first half of 2017, if the accord is strictly implemented. At the same time, the bank sees serious risks that quotas will be exceeded: usually the group overshoots its objectives by almost 5%. If it happens again, quotas will become inefficient. In addition, Citigroup warns that higher oil prices will make US producers increase output, so the market will remain oversupplied. If that is the case, oil prices will stay under negative pressure.
Brent oil opened with a gap up at 49.40, but then slid below 49.00.