Can OPEC deliver on production cut decision?

29 September 2016

By Alison Baker

OPEC’s decision to cut production will have come as a surprise to many observers. It has been some time since they have taken co-ordinated action to reduce production. However, it does illustrate the level of fiscal pain many of the member states are going through.

That said, their announcement will have been welcomed by the market, as they show their intent to support prices. The oil price received an immediate fillip rising to about US$49/bbl in the aftermath of the announcement.

However, there still remain two key uncertainties. Can OPEC deliver this reduction and will it be enough to stabilise the oil price? It is not clear which producers will be required to make the cuts. Iran’s production growth is beginning to ease off but they will be intent on reaching as close as possible a target of about 4m bbls/d. Other producers like Nigeria and Libya will be keen to renew growth following a period of geopolitical instability. Moreover, the geopolitical dynamic among certain OPEC members will also make it difficult to execute this deal.

As to whether the reduction is enough, time will tell. The higher end of what they agreed today suggests a cut of some 700,000 bbls/d. This is probably at the lower end of what the market requires. So there is a risk should OPEC successfully execute on their commitment, the impact on prices might be limited. As for the US oil tight oil producers, they have felt the pain of lower prices but the industry has proved itself itself resilient enough to survive. Any price recovery will be welcomed by this sector given their demise had been forecast in the past by some.

 

Alison Baker | UK Head of Oil & Gas
Email | +44 (0)20 780 43314

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