Does OPEC+ deal have a future?

Does OPEC+ deal have a future?

Saudi Arabia proposed to make the deal between OPEC and their non-OPEC allies permanent after the completion of a deal to reduce oil production, Saudi Energy Minister Khalid al-Falih said.

"At the end of the year, we will understand what needs to be done. But we definitely want to continue cooperation with non-OPEC countries. It is the key thing. Whether it's information exchange and talks about increasing supply and demand, or keeping production levels," al-Falih said.

"We also need to think about how to get out of 2018. And do it gradually, not jerk," the head of Saudi Arabia's Energy Ministry added.

OPEC and 10 non-cartel oil producers reached a deal in December 2016 in Vienna, agreeing to cut oil output by a total of 1.8 million barrels per day in an effort to stabilize global oil prices. On November 30, the major oil exporters have unanimously agreed to extend the agreement on the reduction of oil output by another nine months until December 31, 2018.

A leading analyst of the National Energy Security Fund, a lecturer at the Financial University under the Government of the Russian Federation, Igor Yushkov, speaking to Vestnik Kavkaza, noted that al-Falih's statement should be viewed as another positive stimulus for the global oil market, but not as a worked out plan for transforming the OPEC + format into a regular mechanism for controlling the global output.

"I think this is one of those positive news events that should be constantly generated by the participants of the deal to make it successful. Traders need such positive news all the time," he explained.

"Russia and other non-OPEC oil producers could be present as observers at the cartel's sessions in Vienna. If the price goes down sharply at some point, it will be possible to quickly sign a new agreement to reduce or regulate output. But we should not expect that there will be further commitments on output volumes, at least from Russia and non-OPEC countries - only the possibility of promptly assuming these obligations in the case of a force majeure situation in the market. The dialogue with OPEC is unlikely to go further consultations format," Igor Yushkov predicts.

The expert drew attention to the fact that in the current form the OPEC + format is based on trust only. "The countries report to their statistical agencies, and other countries trust these official data, since it is actually not beneficial for anyone to raise the issue of real compliance. If someone requires a check, traders will immediately start selling futures. While the special monitoring committee confirms the implementation of the reduction volumes, prices increase," a leading analyst of the National Energy Security Fund said.

The advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house, economist Sergey Hestanov, stressed that there are costs and benefits associated with the deal itself. "The main benefit is the price increase. The cost is the increase in the US oil output of more than 1 million barrels per day, which is quite a lot. Naturally, this state of affairs cannot continue indefinitely, sooner or later the deal will be completed. This statement by the Saudi minister is a certain sounding of the market, how it will perceive a possible conclusion of the deal," he said.

At the same time, the expert noted that the mechanisms of control over the oil output in an open market were very effective. "As soon as the deal was signed, oil prices doubled, which is a big figure. In principle, this deal has brought great success. Another thing is that if something gets better in one place, then it deteriorates in the other. Together with a twofold increase, about 1% of the market was lost, since this niche was occupied by representatives of non-OPEC countries," Sergei Hestanov concluded.


Vestnik Kavkaza

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