A positive sign in “black gold” market

Friday, 2019-02-15 11:06:27
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A view of Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia. (Photo: Reuters)
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NDO – The mining output of the Organisation of Petroleum Exporting Countries (OPEC) in January fell to its lowest level in four years, after the organisation reached an agreement on the reduction of its oil production. There are hopes that the “black gold” market will recover following a long period of slipping with oil prices having dropped sharply by 36% since October 2018. A better balance between supply and demand is expected to bring more stability to the oil market.

In the monthly report recently released by OPEC, the organisation’s January output decreased by 0.93 million barrels a day to 30.83 million barrels a day. This is the result of a consensus between OPEC member countries and non-OPEC partners in agreeing to cut crude oil production by 1.2 million barrels a day in the first half of 2019, aiming to revive oil prices and take control of the redundancy. Saudi Arabia, a major oil producer in OPEC, took responsibility for reducing output by 322,000 barrels to 10.3 million barrels a day. Meanwhile, Russia, a non-OPEC country, pledged a reduction of 228,000 barrels per day.

It was not an easy step to reach consensus on output reduction because countries must accept concessions for the common good. The support from Russia, a major partner of OPEC, is extremely important, alongside Iran’s voluntary reduction of about 800,000 barrels per day from 2019. This is said to be a move of compromise from the Iranian side toward Saudi Arabia, a rival of Teheran in the region. The countries agreeing to set aside their own calculations and benefits to cut output aims to avoid the repetition of the scenario of a sharp plunge in oil prices, because if this happens, it will not only negatively affect oil exporting countries but also cause many implications for the world economy, as oil is considered a measurement of the global economy’s “health”. Most OPEC members are concerned about falling oil prices while revenues from oil exports contribute significantly to their budget. It is estimated that OPEC members have suffered losses of up to US$9 billion due to dropping oil prices, while the reduction of output risks them losing market share to other producers.

The evolutions of the “black gold” market in the first month of this year showed that the agreement to cut oil production has taken effect, making the market more stable after the oil price dropped sharply. However, analysts are still concerned about the stability of this highly precarious market. In order to balance the market, countries, both inside and outside OPEC, must strictly abide by the deal to cut production, regardless of the fact that this may cause significant losses to their own interests. Meanwhile, OPEC is also thought to be influenced by non-member countries. OPEC’s decisions are under great pressure from countries that control global oil supplies such as the United States and Russia. Besides, internal disputes and disagreements among OPEC member countries are also at risk of affecting the implementation of the agreement. The conflict between Saudi Arabia with Iran and Qatar, if left uncontrolled, will affect the oil market when no country wants to cut output. In the current context, the countries reaching an agreement on the reduction of oil production has been seen as the best solution to avoid a bad scenario regarding oil prices. In fact, after the deal was introduced, the “black gold” market reacted in a positive direction with oil prices immediately rising by 5%. However, the challenges that OPEC currently faces are from external factors. The non-OPEC countries increasing output to gain market share will also pose a big challenge to this bloc in the future.

OPEC is facing multiple difficulties, as not only must it make a reasonable cut to maintain oil revenues and avoid cracks within the bloc, but also balance the market. The recent efforts by OPEC and Russia to ensure production cuts have helped stop the slump of oil prices. This is said to be a positive step in the efforts to stabilise the “black gold” market, however, the reality also depends on many objective factors, including geopolitical factors.