OPEC, Non-OPEC Close Ranks
Over the past one month, OPEC and non-OPEC oil producers have made key decisions about oil production. These decisions will definitely influence oil prices in the global energy markets. The most important agenda of the 171st ministerial meeting of the Organization of the Petroleum Exporting Countries in Vienna was to curb oil output. The decision adopted on November 30 was in continuation of earlier talks held in Algiers in September.
In the Algeria meeting, OPEC member states offered to bring their output down from 33.64 mb/d to 32.2 mb/d. During the November meeting, OPEC agreed to slash 1.76 mb/d from its output in a bid to prop up prices. Some non-OPEC countries followed suit. The OPEC agreement was described as historic.
A review of details of these meetings and their outcomes in the market is of high significance.
OPEC Revival
Since its establishment in 1960, OPEC has faced ups and downs during its 56 years of work. It has sometimes been instrumental in the oil market developments and has helped restore oil producers' rights. But due to internal differences or other factors, OPEC has also seen its role decline. But the 171st meeting was one of the most important OPEC meetings in terms of influence on world markets. Before the November meeting, leading global investment banking, securities and investment management firm Goldman Sachs Group had predicted that oil prices would jump to $55 a barrel in case OPEC members agreed to reduce output to 32.5 mb/d.
The US-based firm had also predicted that lack of agreement among OPEC members on production cut would push down the prices to below $45 a barrel.
It was a big challenge to reach agreement on quota cuts within OPEC, particularly because differences between members on quota cuts were intertwined with political tensions. Moreover, OPEC experts' talks on the details of oil production cut had ended inconclusively. Furthermore, Russia that was a key supporter of oil production cut was not present in the OPEC meeting and Moscow's absence was delaying an agreement.
Under circumstances where expectations were low about the achievement of a result as discrepancies between member states had been exacerbated, OPEC oil ministers managed to reach agreement on oil production ceiling rollover for the first time since 2008. During the Vienna ministerial meeting, OPEC ministers agreed to reduce the oil producer group's output from 33.64 mb/d to 32.5 mb/d. Following this agreement, Saudi Arabia accepted to cut half a million barrels of oil from its daily output. Iran's request to bring its output to pre-sanctions levels was accepted. For its part, Russia said it would cut its output by 300,000 b/d in a bid to join the OPEC decision.
The 4.5% decline, which equals 1.2 mb/d, in OPEC's oil output would boost crude oil sales in international markets and would also help revive the body. In recent years, many imagined that OPEC had turned into a toothless body that had fallen prey to differences between its member states. But OPEC's recent agreement is indicative of the revival of this organization and its renewed influence on global markets. OPEC, which is currently producing one-third of world oil and makes up some 53% of the world markets, is regaining its important and influential status in the energy sector.
Victory for All
Before the OPEC meeting, speculation was rife about the positions of OPEC member states particularly Iran and Saudi Arabia. It was imagined that acceptance of demands by either party would mean the failure of other. Iran and Saudi Arabia remained divided on two major issues. One was the amount at which Saudi Arabia was expected to reduce its output and the other was the amount at which Iran's output level was authorized to increase. There were conflicting figures, but what was finally agreed upon was a 486,000 b/d cut in Saudi output to 10.058 mb/d. Iran was agreed to be the only country whose production would not fall over the coming six months and would keep raising its output by up to 90,000 b/d. Saudi Arabia was opposed to Iran's request of exemption from the OPEC cut, but Iran's insistence on its rightful demand convinced Saudi Arabia to show flexibility and modify its stance.
This issue is described as a big victory for Iran's oil diplomacy; however, Saudi Arabia's flexibility could not be interpreted as failure for this country. In appearance, Saudi Arabia and its fellow OPEC members have had to reduce their output, leading to a decline in their petrodollars. But a more precise study of the affair indicates that their decline in oil production will be compensated by oil price hikes. In other words, the number of barrels cut from output by each country would be regained through selling oil at higher prices. Therefore, oil producing countries will not suffer any financial loss in the long-term and they will even be able to gain more revenues by selling less oil. Therefore, all OPEC member states could be seen as winner in the oil output reduction scheme. In addition to OPEC member states, other oil producers achieved success through their agreement with OPEC states. Although they are not OPEC members, they are also victims of the oil price slump. At a time when striking a balance to the world oil market could not be handled by OPEC alone, non-OPEC countries reached a historic agreement and took a significant step for reducing their output and boosting oil prices.
In addition to improvement in oil prices which are expected to reach $60 to $70 in coming months, other sectors of energy would be also revamped. For instance, after the historic agreement between OPEC and non-OPEC states, oil companies have shown willingness for the first time since 2014 to invest in new sources of crude oil in order to boost the market by 2020.
In case OPEC and non-OPEC producers remain committed to their agreements one can be optimistic about the formation of a framework for cooperation between them. Such a framework for cooperation would draw faster reaction to oil market fluctuations in the future.