Oil producers need to cut a deal

Over the past two weeks, oil prices have fallen sharply by 27 per cent after the price of Brent crude plummeted from $81 to $59 a barrel. The drop was caused by many reasons, including the selective exemptions from US sanctions imposed on Iran for eight countries, including China which imports 25 per cent of Iran’s oil.

There was also the rising US oil inventories and uncertainty surrounding the global economy.

Japan and Korea’s imports of Iranian oil had reached zero by November due to the US sanctions. However, the sudden exemptions led some South Korean, Japanese and Indian companies, including Japanese refiner Fuji Oil Co. and Indian Oil Corporation, to sign new contracts to buy Iranian oil. Other companies in Italy and Greece are expected to do the same, while China and Turkey are still importing Iranian oil.

This has made a big imbalance between supply and demand levels, especially as Opec in agreement with Russia had increased production by 2 million barrels per day in anticipation of US sanctions. It goes without saying the exemptions surprised almost everyone and created a surplus in the markets and lowered prices significantly, which may continue if things were not sorted out soon to maintain $70 per barrel.

This is a fair price for producers and consumers alike according to the Russian energy minister. Yet President Trump wants to see a much lower price.

Right solution

Thus, reaching a new agreement between Opec and

Russia is the right solution for this crisis, whereby the previous increase is pulled back to rebalance supply and demand and stop price deterioration. Such an agreement will not lead to excessive price hikes — something that exporting countries don’t like — but at least prices will remain at acceptable rates rather than deteriorate and cause serious damage to oilbased economies.

Here arises an important question: Is there any agreement between all these parties to cut production? Not necessarily, but it is in the interests of producing countries to push for a new deal, especially if prices continue to deteriorate rapidly, as was the case over the past two weeks.

The problem is that Trump has never said point-blank the price that he thinks is suitable for the US, as he only wants to lower prices to the lowest level possible, regardless of the damage to exporters. It’s a one-sided desire that cannot lead to acceptable solutions to oil exporters, both within and outside Opec.

Also, it has to be taken into account that many economic and geopolitical factors will determine price trends. However, if Trump wants to cooperate with other parties, his administration must consider the interests of these parties as well, as producing countries have their development priorities and requirements. For instance, Russia, which considers fair prices important to finance its development requirements and prevent a further deterioration of its national currency if its foreign exchange reserves decline.

Opec and Russia are likely to take action swiftly to tackle imbalances, rebalance oil markets and stabilise prices at $65-$75 per barrel, which would be a fair price for exporters and consumers and for the stability of the global economy as a whole.