Home Business and Economy OPEC Is Alive and Highly Relevant by  Andreas Exarheas

OPEC Is Alive and Highly Relevant by  Andreas Exarheas

OPEC has been described as alive and well and highly relevant following the announcement of its latest output cut deal. OPEC is alive and well and highly relevant.

That’s according to a new report from Fitch Solutions Macro Research, which was sent to Rigzone following OPEC+’s decision to cut 1.2 million barrels per day from the market.

“Despite Qatar’s departure from OPEC, the group was able to build consensus internally and effect substantial cuts,” the report stated.

“This action has reassured markets of OPEC’s commitment to act as a moderator of the oil markets, providing stability and long-term oversight of prices,” the report added.

“In addition, this re-establishes the availability of spare capacity among OPEC members, which would help buffer prices against unexpected supply shocks,” the report continued.

Fitch Solutions Macro Research believes cuts made at the level announced will not hike up oil prices to threatening levels for the United States or emerging market economic growth. The company is forecasting Brent to average $75 per barrel next year.

“President Trump’s reaction to the efforts to reduce production will be closely watched, in particular his support of embattled Saudi Arabia’s Crown Prince Mohammed Bin Salman,” the report stated.

“Rhetoric from Trump is to be expected, but we believe U.S. and Saudi Arabian relations will not be diminished through this level of OPEC action,” the report added.

“The Trump administration could even put a positive spin on the cuts, given that price stability will be supportive of growth in the U.S. shale patch,” the report continued.

‘We Expected a Deal’

Wood Mackenzie (WoodMac) expected an output cut deal at the latest OPEC+ meeting, according to Ann Louise Hittle, vice president of macro oils at WoodMac, who stated that “the stakes were high given the excess supply the market faces in 2019.”

“The complicated issues facing OPEC delayed the agreement, in what seemed like a replay of the delicate talks that led to the first OPEC/non-OPEC production cut agreement in December 2016,” Hittle said in a statement sent to Rigzone.

“This time, however, rather than the talks leading up to the deal being held over months, they were largely held [over a] week,” Hittle added.

The WoodMac representative said a production cut of 1.2 million barrels per day would tighten the oil market by the third quarter of 2019 and cause prices to rise back above $70 per barrel for Brent.

Giving his view of the deal, Abhishek Kumar, senior energy analyst at Interfax Energy in London, said the OPEC+ decision to cut output by 1.2 million barrels per day “will be a key step in rebalancing the global oil market in the first half of 2019.”

“However, individual contributions of countries involved in the deal are still unclear, and so are details of exemptions given to Iran, Venezuela and Libya,” Kumar told Rigzone.

“If the three countries are completely exempted from the cuts and if other member countries fully comply with their allocations then the effective output cut could be significantly higher than the 1.2 million barrel per day level by the end of the first half of 2019. This in turn could tighten the market more than expected,” he added.

“On the other hand, if the agreement is interpreted as the OPEC+ cutting just by 1.2 million barrels per day and no more then there is a real risk of Iran and Venezuela losing out because their oil production is already declining,” Kumar continued.

The Interfax Energy representative also stated that the decision to have the next OPEC+ meeting in April next year is important “because it will give the group a chance to adjust policies further in case the market over tightens.”

“There seems to be a growing acceptance that a price range of $60 to 80 per barrel for Brent crude bodes well with most producers and consumers,” he added.

‘Feels Like a Bit of a Fudge’

Offering her view of the output reduction deal, Ashley Kelty, an oil and gas research analyst at Cantor Fitzgerald Europe, said the supposed cut “is larger than some had expected, although still some way of what is really required to bring the market back into balance.”

“Our initial snap judgement is that prices will stabilize in the $60 to $65 per barrel range, as the cuts are likely to be insufficient to stem the near-term supply glut, given U.S. output is continuing to rise (albeit at a slower pace due to capacity constraints),” Kelty added.

“It feels like a bit of a fudge,” Kelty continued.

Source: Rigzone

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