Oil industry skeptical of OPEC’s latest agreement
Prices rise, but more promises, negotiation required to keep accord from falling apart
What some thought might be a turning point for the Organization of the Petroleum Exporting Countries was looking like another false start Thursday, causing oil prices to rise modestly instead of the booming increase some had expected.
The kind of celebration that would come with an OPEC production agreement, bringing both more stable and higher prices, quickly dissolved when traders took a closer look at the agreement reached in Algeria among OPEC members. It appears more promises and more negotiation will be required to bring it to fruition.
“It’s almost Seinfeldian. They really did nothing,” says Tom Kloza of the Oil Price Information Service. The framework is in place, but the much harder work of hammering out a realistic agreement is yet to occur.
Ed Hirs, an oil economist at the University of Houston, said the oil market’s attitude about the agreement can be summed up simply as, “We’ll believe when you show me.”
With no one exactly showing them yet, the price of West Texas Intermediate, the benchmark U.S. crude, rose only 1.7% Thursday to close at $47.83 a barrel in trading in New York. Brent crude, the European standard, was trading up 1% to $49.24 a barrel.
Time and again, OPEC has tried to cobble together an agreement only to see it fall apart. “You don’t have the ability to stop somebody from cheating,” Hirs points out, and with oil prices having been depressed for so long, producing nations are hungry for all the income their wells can provide. This time, OPEC hopes it has a deal that can stick, limiting production to 32.5 million to 33 million barrels a day.
“The most important details have yet to be worked out and agreed on. That’s why there is some skepticism,” says Jim Burkhard, head of oil market research for IHS Energy. “The tough work is ahead.”
For an agreement to work, most agree Saudi Arabia will have to take the brunt of production reductions. “Saudi Arabia has to take the lead in implementing it,” Burkhard says. But simmering disagreements with Iran make a deal harder to work out.
Then there’s the matter of holding the agreement together. With U.S. producers learning how to make money despite a lower price environment, America’s fledgling oil industry could rise again. And waiting in the wings are Libya and Nigeria.