OPEC’s cutting oil production: An uneasy decision

Sunday, 2018-12-09 15:01:27
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Russian Energy Minister Alexander Novak and UAE's Oil Minister Suhail Mohamed Al Mazrouei attend a meeting in the OPEC headquarters in Vienna, Austria December 7, 2018. (Reuters)
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NDO – Global oil prices have increased again after members of the Organisation of Petroleum Exporting Countries (OPEC) and outside partners agreed to cut crude oil production by 1.2 million barrels per day in the first six months of next year. The uneasy decision was made after days of negotiations despite strong opposition from the United States.

The aforementioned deal to cut crude oil production could be seen as a success of the 174th meeting of OPEC member nations and partners that recently concluded in Vienna, Austria. Since the end of 2017, the output of the world’s biggest oil producers, including OPEC, Russia and the US, has increased by 3.3 million barrels, bringing oil production to 56.38 million barrels a day, meeting 60% of the world’s demand. However, a sharp increase in supplies and a fall in global demand have pushed crude oil prices down 30% in the last two months. In light of falling oil prices, Russia and Saudi Arabia have agreed to renew the treaty on oil production cuts. Iran has also “greenlighted” the reduction of oil output by around 800,000 barrels a day starting from 2019, after reaching an agreement with Saudi Arabia on the possibility of exemption from production cuts under US sanctions.

As many countries outside OPEC, including the US, do not want to cut oil production, it is a tough decision for many OPEC producers and allies to cut supplies in order to push up oil prices. Immediately ahead of the OPEC conference in Vienna, US President Donald Trump had “reminded” that OPEC would keep the flow of oil and not make a decision to push up oil prices. The White House boss also stressed that oil-consuming countries were part of the OPEC discussions even if they did not attend the Vienna meeting. In addition, non-OPEC exporters are even planning to increase oil output, with the US taking the lead. The US President once suggested that OPEC strengthen its oil production to mitigate the impacts of US sanctions against Iran. Meanwhile, even Iraq, a major oil producer within OPEC, does not actually want to cut production because the country is currently in need of oil revenues for the reconstruction of the country. Russia, a major non-OPEC producer, is not so urgent in increasing oil prices as its economy is more diversified and its domestic currency, ruble, is less dependent on the oil market. Saudi Arabia, meanwhile, is believed to want to push up oil prices aiming to help balance the budget deficit caused by sharply falling oil prices.

According to analysts, OPEC’s decision to cut oil output will have a direct impact on the next proceedings in the oil market. If OPEC failed to make a significant cut in production, the sharp drop momentum in oil prices would undoubtedly continue spreading into 2019. So, immediately following the decision of the OPEC members and partners to cut production at a “temporarily sufficient rate”, oil prices suddenly increased by 5%. The prices of Brent crude rose US$3.26 per barrel to be traded at US$63.32. The price of West Texas Intermediate (WTI) crude was up US$2.62 to US$54.11 per barrel before declining by US$53.9. A source from Russia’s Energy Ministry said Moscow is ready to cut roughly 200,000 barrels a day, while non-OPEC countries may cut an additional 200,000 barrels per day, bringing the total cut output up to 1.2 million barrels a day.

The meeting between the OPEC and non-OPEC members comes at a time when the oil market is near the bottom of its worst price plunge since the 2008 financial crisis. Since its peak in early October, global oil prices have fallen sharply for fear of excessive supply and a decline in global stocks, as well as a slowdown in economic growth in certain countries. The newly made cut is considered to be in line with the market’s expectations. Analysts forecast that the move of OPEC and its allies would help cut supplies in the oil market, as previous forecasts suggested that non-OPEC producers will increase their output by 2.4. million barrels per day next year, with US oil output continuing to rise strongly. US government data shows that the country is currently exploiting oil with an unprecedented high output of 11.7 million barrels a day.

Although the deal to cut oil production reached by OPEC and its partners is somewhat reluctant, it is a positive sign of a “handshake” between OPEC and the non-OPEC members aiming to stabilise oil prices. With this move, the “black gold” market is expected to flourish after oil prices were recently near the bottom.