- The Writer holds an MSc from Creighton University and is a PHD candidate in the Turkish National Police Academy
The dramatic decline in oil prices from the second half of 2014 and its long continuation have financially impaired oil exporting countries, but it has taken OPEC a long time to take action to tackle this situation unlike the cartel’s previous reactions in the market. OPEC finally reached an agreement on an oil cut with respectable support from non-OPEC members, especially the Russian Federation. This recent agreement and its potential effects on the market will be discussed.
Let's look firstly at what happened in the oil markets last week to gauge the indicators before and after the meeting -- the dollar index, weekly American Petroleum Institute (API) and Energy Information Administration (EIA) crude oil inventories, weekly U.S. Baker Hughes rig count as well as developments from the meeting.
Summary of previous week
On Nov. 28, the week began with a slight increase in Brent oil prices buoyed with hopes of an agreement at the OPEC meeting. With positive sentiments from OPEC members before the meeting, the decrease in the U.S. dollar index also supported such a price rise, and prices settled at $48.24 per barrel at the end of the day.
On the second day and just one day before the meeting, some conflicting news from OPEC members caused a burst in the bubble of oil producers, resulting in oil prices dropping below $46. By the end of day, prices regained some of their losses and settled at $46.38 at the end of the day.
The third day of week was the most important day of the year for oil producers. OPEC members reached an agreement on an oil cut by 1.2 million barrels per day and to freeze production at 32.5 million barrels per day starting from Jan. 1, 2017. Also, non-OPEC members, especially the Russian Federation, promised to also contribute to an agreement and cut their production to 600,000 barrels per day. With such an agreement, prices soared and settled at $50.47 at the end of the day. In addition, other factors which also impacted the price during the day included the small declines in weekly API and EIA crude oil inventories despite the increase in the U.S. dollar index.
Following the OPEC oil cut agreement, oil prices sustained to surge up with additional support from the decrease in the U.S. dollar index and settled at $53.94 – the highest price seen over the last year.
The last day of week started with high a U.S. dollar index due to the low U.S. unemployment rate expectations, and prices fell to $51.72. However, prices boomed through the decline in the U.S dollar index and despite the increase in the weekly U.S. Baker Hughes rig count and settled at $54.46 at the end of the day and week.
With potentially a FED interest rate hike as well as President-elect Donald Trump’s election win, the U.S. dollar index has been getting higher for a while, resulting in pressure on oil prices. However, with Saudi Arabia leading OPEC and the Russia Federation as the most important player of non-OPEC countries, they appear to have brought relief to the distressed oil market for now. Both also took initial action by suggesting an oil production freeze last February as the prices hit a 12-year low.
Furthermore, Saudi Arabia, backed by Russia, led negotiations for almost nine months, and finally OPEC succeeded in an oil cut deal and in freezing production at 32.5 million barrels per day in accordance with the results of OPEC’s unofficial meeting in Algeria last September. According to the agreement, Nigeria and Libya will be exempt from an oil cut and a further production freeze because of the poor state of their economies. Iran will also increase its current production level by 90,000 barrels per day and sustain production at this level. The OPEC members that contributed to the 1.2 million barrels per day oil cut include;
Saudi Arabia with a reduction of 486,000
Algeria with a 50,000 drop
Angola with 78,000 cut
Ecuador with 26,000 less
Gabon with minus 9,000
Iraq with 210,000 reduction
Kuwait at 131,000 less
Qatar minus 30,000
UAE minus 139,000
Venezuela at minus 95,000.
The agreement was made for six months with the condition that it can be further extended for another six months. The agreement also stipulates that non-OPEC members, led by Russia, will also participate in an oil cut of 600,000 barrels per day. However, it remains to be seen if all parties - OPEC and non-OPEC members, will stick to the agreement.
The answer can be determined at the next meeting between OPEC and non-OPEC members in Vienna on Dec. 10. According to the Russian Energy Minister Novak, some non-OPEC producers -- Azerbaijani, Oman, Mexico and Kazakhstan -- are willing to take part in a production cut to meet half of non-OPEC's cut of 300,000 barrels per day. It is anticipated that Russia will meet the remainder.
-What if Libya and Nigeria recover their production losses faster than expected?
If Libya and Nigeria speedily recover their production losses, such a resumption could cause problems between OPEC members. Both countries have the capacity to increase their production to a daily amount equal to the OPEC’s agreed oil cut level should stability be provided for oil investments in their countries.
-Will soaring prices mobilize U.S shale producers to produce more?
After the sudden decline in oil prices, U.S shale oil production fell to about 1 million barrels per day. However, shale producers adapted to low oil prices and began to invest in shale oil production. This development can be seen through the straight increase in the U.S Baker Hughes’ rig count over the past 27 weeks. Therefore, it is very likely that U.S shale producers will increase their investment to ramp up production.
It is becoming clear that prices would like to settle in the range between $55 and $60 with OPEC’s oil cut agreement despite the high probability of a FED interest rate hike in December. However, the answer to the questions above will reflect the route that prices will take because no significant development on the demand side is evident. A balance in the range between $45 and $53 again may be still not be too far away.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.