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.

Higher in­ven­to­ries

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.

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