Market watchers skeptical about OPEC deal
After about forty eight (48) hours of a gruelling meeting of the Organisation of Petroleum Exporting Countries held in Algeria, the oil cartel agreed to a landmark deal that will effectively cut production to 32.5 million barrels per day from around 33.24 million, with levels of output for each member country to be determined in November 2016.
But industry watchers are of the view that the deal would not hold as because of mutual mistrust among members.
Also, the Wall Street Journal noted that the agreement “wasn’t enough to break crude from the roughly $40-to-$50 range it has traded in for months, but some analysts said any sign of cooperation from the group is bullish for the oil market.”
This will be the first time in eight (8) years that OPEC would be reaching such an agreement. This could be loosely tied to the role that has been played by member countries, including Nigeria, in refocusing OPEC to work harmoniously in identifying needs and challenges that are peculiar to the body and surmounting them.
A key challenge being the low price of oil in the international market which has affected the global economy with most OPEC member countries feeling the heat.
OPEC member countries reached a consensus in the agreement where three countries are exempted from the production cuts and they include, Iran, which just had its economic sanctions lifted earlier in the year, Libya and Nigeria who have had some of their oil facilities damaged by terrorist attacks in recent months.
Emmanuel Ibe Kachikwu, The Minister of State for Petroleum Resources, who led Nigeria’s delegation at the meeting argued for the exemption of Nigeria from the production cut. The concession was given considering the recent challenges the country has been through, due to vandalism of oil and gas infrastructure which has negatively impacted the country’s ability to produce oil optimally in the recent past
Iraq, meanwhile, has already voiced its displeasure at various secondary sources, including Platts, which it says are underestimating the country’s output, potentially putting it at a disadvantage when the individual country quotas are set.
This deal will obviously enhance the prospects for the energy industry with the impacts already being felt as oil price jumped more than 5 percent in New York after the agreement was reached. A steady increase in oil prices which is one of the advantages that the deal will produce would most likely contribute positively to the revival of the economies of member countries presently undergoing challenges which Nigeria is a part of. However, many of the details of the production cut deal are still being worked out by member countries and the group won’t decide on targets for each country until its next meeting at the end of November 2016;
Reports from various media organisations across the world showed how the markets reacted to the decision of the cartel the following day. Commodities and stock markets rebounded upon the news, with Reuters showing oil prices up nearly 6 per cent the day the decision was reached. The dollar rose to an eight-day high against the yen, while the FTSE 100 index rose to a six-week high.
“The oil industry faced deep cuts in investment and massive layoffs, leading to a potential risk that oil supply may not meet demand in the future, with a detrimental effect on security of supply.
“The conference took into account current market conditions and immediate prospects and concluded that it is not advisable to ignore the potential risk that the present stock overhang may continue to weigh negatively well into the future, with a worsening impact on producers, consumers and the industry,” OPEC said via statement.
Furthermore, OPEC member countries decided to dialogue with non-member producing countries, with the aim to stabilize the market.
Unfortunately, the outlook surrounding the decision is still murky. Details, including production levels for each member country, will be fleshed out in OPEC’s Nov. 30 meeting in Vienna. This has led some analysts and news outlets and others, to question the agreement, noting that this lapse in action leaves plenty of time for the deal to derail.
A few news outlets reported that already “cracks are showing in the accord’s foundations.”
“In recent months, resurgent Iranian and Libyan output seemed likely to be OPEC’s biggest challenge in reaching a deal,” the outlet reported. “But it was Iraq that almost blocked the agreement Wednesday by objecting to the oil-production data OPEC generally uses to determine how much each country can produce, say people familiar with the matter.
Meanwhile OPEC crude output rose again in September to a record high of 33.24 million b/d, an S&P Global Platts survey showed October 6. The figure is 110,000 b/d higher than August and marks the fourth consecutive month of growth, as output rises in Libya, Iraq, Nigeria and Iran more than offset declines from Saudi Arabia, Angola, Qatar and Venezuela.
Olusola Bello