Sunday, 13 June, 2021

OPEC surprise deal: a victory for Saudi Arabia?


The organization of the oil-exporting countries reached an agreement in Vienna to reduce production by 1.2 million barrels per day. A result that seems very favorable to Saudi Arabia.

Saudi Energy Minister Khaled al-Faleh on November 30, 2016 in Vienna

Mission accomplished for OPEC. The cartel announced Wednesday, November 30 in Vienna that it had reached an agreement to reduce its production from 1.2 million barrels per day to 32.5 million. The oil organization has therefore ratified in the Austrian capital what had been designed two months ago in Algiers. It is the first time since 2008 that the 14 members of the cartel have managed to agree to limit their production, thus defying the pessimism of many observers. As for the markets which had plunged by 7% in April after the last OPEC meeting which ended in a fiasco in Doha, they welcomed this agreement. The barrel of Brent, a European benchmark, takes nearly 8% and passes the $ 50 mark. As for the WTI, the American benchmark, it gained 9% at its highest for a month.

In detail, Saudi Arabia is the country which contributes the most to this effort with a reduction in its production of 486,000 barrels per day. To this must be added a drop of 300,000 barrels conceded by three countries: the United Arab Emirates, Kuwait and Qatar. Iraq, which along with Iran was among the countries most resistant to this effort, finally released ballast and accepted a drop of 210,000 barrels. And Tehran has also made concessions. The Iranians have certainly obtained the ability to increase their production from 90,000 barrels to 3.7 million, but it is far less than the 200,000 barrels more they hoped for. To this agreement, which will be effective on January 1, 2017, we must add Russia’s commitment to reduce its production by 300,000 barrels per day.

“The Saudis have succeeded”

“It is an agreement which is rather a surprise given the declarations of the ones and the others these last days, estimates Benjamin Louvet, specialist in the raw materials at OFI Asset Management. But it is a favorable agreement for Saudi Arabia. The Saudis have succeeded. They did not want to take on this effort alone, they did it. They didn’t want Iran to increase production by 200,000 barrels, it won’t. And this agreement is not going to increase prices much, which would benefit the American producers of shale that Saudi Arabia wants to suffocate ”. To this must be added a fairly painless drop for the Wahhabi kingdom which traditionally at this time of year decreases its production by at least 300,000 barrels for climatic reasons.

To read: Oil: Saudi Arabia or the permanent coup

However, this agreement presents certain gray areas. In order for it to be valid, OPEC requested a reduction of 600,000 barrels per day from non-OPEC members before the meeting. Russia has agreed to make a half effort. But OPEC has not said which countries will divide the other half. “We will get there” simply commented Qatari Energy Minister Mohammed Saleh al-Sada, who chairs the OPEC conference, after the meeting. Azerbaijan and Kazakhstan should however be involved.

What impact on prices?

Mohammed Saleh al-Sada also announced that a monitoring committee chaired by Kuwait, Venezuela and Algeria would ensure compliance with these quotas. But what will happen if they are not respected? “This is a real question, supports Benjamin Louvet. Very rarely have OPEC agreements been respected. The big producers like Saudi Arabia, Kuwait or to a lesser extent Algeria, have very often freed themselves from the ceilings they had approved ”.

As for the price of a barrel which fell from 114 dollars in June 2014 to 27 dollars in mid-January 2016 and which has fluctuated for several weeks between 45 and 50 dollars, its evolution will be closely scrutinized. In a note published Tuesday, Morgan Stanley estimated that prices will hover between $ 40 and $ 55 for much of 2017. Goldman Sachs, for its part, forecasts an average price of $ 45 until the summer.

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