One Small Step For OPEC, One Giant Leap For Global Markets

It has been a tough year and a half for oil, specifically the price of a barrel of crude in relation to the sheer volume of it being pumped from the ground. Since April of 2015, the price for crude has been declining steadily, and has subsequently been wreaking havoc on global markets and economies on its way down. In an effort to curb the damage, the Organisation of the Petroleum Exporting Countries (OPEC) met on 28 October 2016 to come to an agreement on the possibility of cutting overall production of crude oil.

Following the simple rules of supply and demand, when the supply of a ‘precious’ commodity increases drastically, the demand for it will fall, as will the price. Consequently, after the aggressive push by certain countries to monopolise the oil market by oversaturating supply, the price of oil has taken a beating. With the Kingdom of Saudi Arabia having a deeper and younger supply of oil fields than most other countries, it seems that the country’s leaders have been trying to create a corner in the market, as shown through Saudi’s record high production of around 10.6 million barrels a day during the month of August this year. In theory, by producing oil at a lower price than most other countries, an oil corner should have been possible. However, with fierce competition arising from other countries, as well as buyers having already filled their oil reserve supply, Saudi has not seen its actions have the desired effect. Astonishingly, due to its own oversupply, Saudi Arabia’s GDP is currently comprised of a sixteen per cent deficit, which accounts for around 100 billion dollars despite having run a twelve per cent surplus a mere four years ago. Nevertheless, the last time OPEC met in April 2016, Saudi’s oil minister Khalid Al-Falih, alongside Deputy Crown Prince Mohammed bin Salman, still refused to cut oil production. Not without reason however, since the United States and other nations came to a nuclear agreement with Iran and lifted their sanctions in January of this year. Saudi has been suspicious of Iran’s own agenda to monopolise the oil market and vie for hegemony in the Middle East, and rightly so.

During the April OPEC talk in Doha, while Saudi Arabia determined that they would cut production only if the rest of the OPEC countries would as well, Iran outright refused to cut their production. Not to put the blame solely on the shoulders of the leading members of OPEC, shale and fracking companies are partly at fault. Both use methods more environmentally damaging than is typical to oil production and they have contributed to such an over supply of oil in the market. However, the continual fall of oil prices have also made it much harder for shale and fracking companies to compete in such a cutthroat environment.


Image courtesy of Imahornfan, © 2005, some rights reserved.

In any case, this failure to come to a conclusion to end global oversupply of oil has not only caused downward shocks to many energy and energy dependant companies but has also further perpetuated the economic downturn in many of the OPEC countries themselves. Aside from Saudi Arabia, Angola has seen a four per cent decrease in economic growth in three years, and has recently looked to the International Money Fund for assistance. Venezuela, another OPEC country hugely reliant on oil production, is in the midst of a crisis at least partly fuelled by the drop in oil prices, which has lead to sky-high inflation and political turmoil. Additionally, countries such as Russia, Nigeria and Iraq have also seen significant fall-out from low oil prices, which in some cases has led to political strife in addition to falling GDPs. Thus, with the stage set by downwards-spiralling oil prices, an unseen cap to oil over-supply and the stubborn resolve of OPEC nations to continue the aggressive pumping of oil the outcome of the next OPEC meeting did not look optimistic.

On 28 September in Algiers, OPEC finally agreed to cut production up to two per cent overall. With the term ‘overall’ alluding to 33.2 million barrels a day, in addition to the fact that OPEC has not previously agreed to a production cap in over eight years, a two per cent cut should be taken seriously by the international community. As a result of the meeting the markets rallied, the price of oil finally broke the fifty-dollar ceiling and for the first time in a long time things were looking up for the energy sector. Delving deeper into the specifics of the September deal, Saudi Arabia has agreed to take the brunt of the proposed cuts, at almost half a million barrels a day. However, while further cuts have been agreed, Iran has still not specified its cap on production, and neither have other OPEC nations such as Nigeria and Libya, who have also voiced their desire to pump more oil instead. As a result, a few days after the September meeting, the aforementioned lack of specificity, along with OPEC’s history of indecision, caused a decline in investor trust in the decision to cut production. Despite the historic significance of an agreement between OPEC nations, the price for a barrel stumbled below fifty dollars, and the markets tumbled once again.

Looking forward however, with US oil stores in need of re-stock after having fallen for five straight weeks, as well as low stock piles in Europe and Singapore, it would seem that demand may finally match supply. This glimmer of hope has caused another rally in oil price, and US crude bounce back above fifty dollars a barrel in the morning of 10 October. To reinforce their decision, OPEC also wants to include non-OPEC nations such as Russia, Oman and Azerbaijan, in their deals to cut supply, an effort that shows that OPEC is taking their agreement seriously. With the price of oil having fallen from over one hundred dollars in 2014 to below thirty earlier this year, perhaps a price point that hovers around fifty dollars is not such a negative. And with winter coming soon to the north, the demand and price for oil may continue to be on the rise.