OPEC’s roll of the dice

Background: Global oil market, Organisation of the Petroleum Exporting Countries (OPEC), West Asia crisis, Syria and Iraq crisis.

  • The agreement reached at the extraordinary meeting of the Organisation of the Petroleum Exporting Countries (in Algiers) to trim the cartel’s collective output by about 700,000 barrels a day, in an effort to balance supply and demand in the global oil market, caught markets by surprise.
  • It was well-acknowledged that the group needed to take decisive action to staunch the two-year-long slide in global crude prices, that saw Brent prices more than halve from about $103 a barrel in end-August 2014 to $45.45 a barrel on September 1 this year.
  • Still, it was unclear if there could be a meaningful consensus on production cuts among disparate member-countries – which included the small-yet-prosperous West African country of Gabon, crisis-hit Venezuela, and fractious West Asian nations such as Iran and Saudi Arabia.
  • That the 56-year-old grouping arrived at an agreement, albeit after leaving a decision on country-specific production targets to November, reflects just how desperate the situation had become for most oil-producing economies.
  • While the big US shale producers have resiliently hung on and even begun investing in new acreage this year, Saudi Arabia found itself with a huge hole in its budget.
  •  Given the country’s involvement in conflicts across the region, both openly as in Yemen and tacitly as in Syria, its rulers have possibly realised the need to squeeze more revenue out of every barrel of oil.
  • OPEC reportedly made a concession to Iran in order to win its involvement in the deal by exempting it from immediate production caps. With demand growth for petroleum slowing far more rapidly than previously predicted, the success of the production curbs in reviving oil prices will significantly hinge on cartel discipline – something that has often been lacking in the past.

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