Oil Surges Higher as OPEC Forms a Consensus

Andamento del mercato - 30/11/2016

Despite all the acrimony surrounding OPEC negotiations to help restore balance to the global energy supply, members managed to band together to forge an agreement during Wednesday’s meeting.  Preliminary reports suggest that Saudi Arabia will be responsible for shouldering the majority of the cuts.  According to available information, OPEC will cut output by 1.200 million barrels per day to reach 32.500 million barrels per day in collective production.  Although the full details of the proposed agreement have not yet been announced, it appears that Iran will be allowed to produce up to 3.900 million barrels per day, defying calls for the Islamic Republic to hold production nearly 200,000 barrels low.  Besides the OPEC agreement, it is also feasible that non-OPEC producers will join the cartel in cutting output in an attempt to support the market.  However, despite the headline optimism and steep rally in crude prices throughout the session, risks to implementation remain significant.  One of the least commonly discussed issues about any deal has been enforcement of output quotas.

At present, there has been no mention of how OPEC will monitor member’s output and what measures will be taken against those members that exceed their quotas.  Besides the enforcement issue, one of the other problems with the deal is that it may not lead to a complete rebalancing of the market.  If the current glut means that output exceeds demand by 1.500-2.000 million barrels per day, OPEC’s modest 1.200 million barrel cut will not be enough to overcome the ongoing supply-demand mismatch.  Furthermore, higher prices may bring about the revival of more unconventional oil production in the United States and Canada.  Heavily indebted companies may use higher prices as an opportunity to pump more in an effort to alleviate burdensome liabilities.  Should this development transpire, more US and Canadian production may come back online, completely negating OPEC’s cuts.  As a result, even though WTI futures may rebound back above $50.00 per barrel, the stage is set for another retreat in the subsequent months.


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