OPEC’s Vienna oil pact raises many questions
No clear message over exit strategy, say analysts
OPEC may be celebrating a historic deal to extend supply cuts, but after the party, the organisation will face a trio of questions it left unanswered.
Will the lucrative yet delicate relationship between Saudi Arabia and Russia survive the life of the agreement? Will surging US shale output prove too much temptation for OPEC countries to stick to their own production promises? And, perhaps most perplexing: What does OPEC have planned, long-term?
The deal to maintain the cut another nine months, hammered out last week in Vienna, could expire in March with a return to OPEC’s pumpat-will policy that prevailed between 2014 and 2016 and pushed prices below $30 a barrel. Or the organisation could keep adjusting production.
“What concerns me is that there is no clear messaging around the exit strategy,” Ebele Kemery, at JP Morgan Asset Management, told Bloomberg TV. “The way we look at the market going forward, there’s going to be oversupply in 2018. They’re talking about price stability. To get price stability we need to know what the end-game is.”
Kemery’s concern over a lack of strategy appeared widespread. Brent crude fell 5 per cent to $51.24 a barrel on the decision, wiping out most of the gains since Russia and Saudi Arabia publicly backed the nine-month extension.
Despite an admission that November’s landmark agreement to limit output failed to eliminate the global oil glut, the commitment of twodozen oil-producing countries did succeed in establishing a new floor for prices that’s well above the lows seen last year. “OPEC is settling in for the long haul,” said Roger Diwan, an OPEC watcher at consultant IHS Markit Ltd in Washington. “I think we’ll remain between $50 and $60 a barrel for the time being.”
The agreement, which includes countries accounting for 60 per cent of the world’s oil production, has already delivered for national budgets from Moscow to Tehran, as higher prices outweighed lower production.
“This is a historic deal, it already was in November and now still more,” said Jan Stuart, chief energy economist at Credit Suisse Group AG. “Now we have more confidence of a 2017 rebalance.”
The extension to March prolongs a rare period of collaboration between the Organization of Petroleum Exporting Countries and some of its biggest rivals. The last time both sides worked together was 15 years ago. Back then, the agreement fell apart soon after it was made.
Resurgent US production has meant oil inventories remain well above the level targeted by OPEC ministers.
Analysts at energy consultant Wood MacKenzie said the deal extension would help US shale oil output accelerate to its fastest growth rate in years. In 2018, global oil inventories would increase by about 600,000 barrels a day in the first quarter, followed by about 500,000 each quarter for the rest of the year. There’s still an oversupply to wrestle with, said Simon Flowers, chief analyst at the consultant. After more than two years of flip-flopping from market management to pump-at-will and back again, it’s not clear what OPEC will do next.