Will oil cut have last­ing im­pact?

Kuwait Times - - ANALYSIS - Com­pli­ance

It seems like a big deal. But the joint pro­duc­tion cut from OPEC and non-OPEC coun­tries - the first in 15 years - might push up the price of oil less than the na­tions in­volved are bank­ing on. At over $50 a bar­rel, oil prices re­mained buoy­ant and well above re­cent norms on Mon­day, re­flect­ing the cut­backs to pro­duc­tion agreed to this week­end and with rea­son. Less than two weeks af­ter mem­bers of the Or­ga­ni­za­tion of the Petroleum Ex­port­ing coun­tries agreed to pare 1.2 mil­lion bar­rels a day of their pro­duc­tion, they were joined by nearly a dozen out­siders Satur­day who pledged an ad­di­tion daily 558,000-bar­rel cut.

On Mon­day, the price of US bench­mark crude rose $1.33, or 2.6 per­cent, to set­tle at $52.83 per bar­rel in New York. The price of Brent crude, the in­ter­na­tional stan­dard, rose $1.36, or 2.5 per­cent, to fin­ish at $55.69 a bar­rel in Lon­don. The OPEC cut­back alone would have been note­wor­thy as the first time in eight years the car­tel was able to agree on such a move. That, the ad­di­tional re­duc­tion by other 11 na­tions, and Saudi Ara­bia’s pledge to cut its pro­duc­tion even fur­ther if needed, is leav­ing even hard­nosed an­a­lysts im­pressed.

Jason Schenker of Pres­tige Eco­nomics calls Satur­day’s de­ci­sion “a his­toric deal,” and there is lit­tle doubt that in the short term the com­bined cut will re­sult in some­what more pricey oil - and, by ex­ten­sion, car fuel, heat­ing and elec­tric­ity. But the up­ward trend might soon peter out, leav­ing prices well short of the highs of around $100 a bar­rel last seen two years ago. Pres­i­dent-elect Don­ald Trump has promised to free up more oil drilling in the US, which would in­crease global sup­ply. More US shale oil, which was un­prof­itable to pro­duce at the price lows around $35 a bar­rel touched ear­lier this year, could be­come vi­able again, fur­ther in­creas­ing sup­ply.

And de­mand is not ex­pected to rise strongly, as the world econ­omy strug­gles. China’s econ­omy, with its mas­sive, en­ergy-hun­gry man­u­fac­tur­ing sec­tor, is slow­ing. And Europe’s econ­omy, a net im­porter of oil and gas, is stag­nant. Com­pli­ance is also an is­sue.

Past OPEC at­tempts to re­duce out­put and push prices up­ward have failed due to mem­bers pump­ing above their quo­tas. That con­trib­uted to the world­wide glut that com­bined with fee­ble economies of con­sum­ing coun­tries to bring down prices to as low as $35 early this year. And out­side OPEC, some of the cut­backs will be dif­fi­cult to ver­ify, leav­ing no choice but to take the word of the coun­try in­volved that it is ful­fill­ing its pledge.

Not­ing such big ifs, an­a­lysts at Ger­man bank Com­merzbank, in a re­search note said “we re­main skep­ti­cal ... de­spite talk of this be­ing a ‘his­toric demon­stra­tion of unity’.”“This is be­cause we are con­vinced that the ex­pec­ta­tions re­lat­ing to vol­un­tary pro­duc­tion cuts, which have been driven to ex­ces­sively high lev­els in re­cent weeks by oil pro­duc­ers, can­not be ful­filled.” The pac­ing of the cuts also could dent pro­duc­ers’ hopes that enough crude will be with­drawn in real time to push prices sig­nif­i­cantly higher in the long run.

Rus­sia has said it will cut daily out­put by 300,000 bar­rels. But it plans to drib­ble out its share of the re­duc­tion over the com­ing months and JBC En­ergy said in a re­search note that the strat­egy will trans­late into a drop of only 80,000 Rus­sian bar­rels for the first half of next year. So, while prices are up, hopes may soon be down for the 22 na­tions in­volved that their deal will re­sult in a re­turn to sus­tained high prices - and some an­a­lysts are hedg­ing their bets. “His­toric agree­ment or his­toric bluff?” asked Com­merzbank in its note Mon­day. — AP

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