Business Standard

Monday, December 23, 2024 | 03:00 PM ISTEN Hindi

Notification Icon
userprofile IconSearch

Opec's tactical switch could be a win-win for global crude market

The International Energy Agency has warned that market rebalancing will be postponed until the latter half of next year, weighed down by oil stockpiles

Image

Paul Hickin
The Organization of the Petroleum Exporting Countries (Opec)'s tentative consensus in Algiers to rein in production by returning to a 'market management' strategy, from its pump-at-will 'market share' strategy, is likely to speed rebalancing of the crude oil market and push up prices. However, the home straight - from now until the agreement is hopefully finalised on November 30 in Vienna - will be the hardest.

The framework deal to curb output to between 32.5 million and 33 million barrels per day (bpd) could take at least 700,000 bpd out of the market. And, according to S&P Global Platts' analysis, would drive oil prices as much as $10 per barrel higher in 2017 if that reduction is sustained.

Possibly of greater importance is the return of Saudi Arabia and Opec to active market management, since it sends a signal that enough is enough. Saudi Arabia probably feels it has done all it can to crush rival suppliers, leaving much production around the world still-born and clipping the wings of key rival US, shale.

The International Energy Agency has warned that market rebalancing will be postponed until the latter half of next year, weighed down by oil stockpiles. Opec, particularly Saudi Arabia, wants some respite from persistently low prices, hopeful that US shale will be reluctant to return with the same pizzazz as during the $100-barrel-plus era.

Nevertheless, US producers will be watching the unfolding drama with an eagle eye: The market by the same token will be watching US rig count data. US rig counts are predicted to grow by 29 per cent in 2017 if the Opec deal is implemented, according to Platts.

The recent $40-50 barrel range has been a lose-lose situation: Not low enough to grind the more economical and adaptable shale producers into the dirt and not high enough for Opec members to truly thrive. At $60-70 a barrel, it could well be a win-win for Saudi/Opec, as well as shale producers.

However, several hurdles need to be overcome for the 14-member producer group to get the deal over the finishing line.

First, Opec needs to put together a committee to decide how to divvy the output total among members, noting that Iran, Nigeria and Libya - which could add one million bpd in the coming months - will be treated as special cases, given that they have been producing sub-par levels. How that extra burden is shared among the rest will be pivotal, even if Saudi output is likely to fall around 400,000 bpd with the peak summer season over.

Also, each country's output will need to be calculated on secondary source estimates, to which Iraq is opposed, as these are often lower than country self-reported figures. Another challenge will be recruiting non-Opec members to join the cuts, as Opec - accounting for around a third of the market - might not make the same difference by itself. Russia, producing more than 11 million bpd, may have been at talks in Algiers, but it neither has the will or the ability to bring about significant cuts.

Even if somehow oil producer members can make tough compromises, they will need to stick to these. If history is a guide, that could be the hardest part of all.

The author is editorial director, S&P Global Platts
 

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: Oct 09 2016 | 11:38 PM IST

Explore News