OPEC production output cut deal – one year after

Nearly a year ago, on November 30, 2016, the Organization of the Petroleum Exporting Countries signed its landmark production output cut deal together with a group of non-OPEC producers led by Russia, to restrain output in a bid to end a global supply overhang and prop up prices.

The deal to curb output is due to expire in March 2018, but OPEC will meet tomorrow to discuss the outlook for the policy.

One year later, OPEC’s strategy has defied misconceptions and skepticism that prevailed a year ago and is showing signs of success in bolstering prices, with Brent trading above $60 a barrel this month after dropping to less than $30 a barrel last year.

A significant amount of oil supply has been taken off the market by OPEC as a result of a policy decision as opposed to natural declines or a lack of investment. Statistics indicate that the deal, which was designed to drain record high oil inventories, helped to accomplish the goal despite a rampant non-compliance by smaller exporters.

There are challenges though. The oil cartel is already grappling with volatile production in Nigeria and Libya, and Iraq adds another layer of unpredictability. While supplies from Libya and Nigeria, which do not have formal production limits under the current OPEC deal, show some signs of stabilizing, Iraq is becoming more erratic.

Iraq’s output fell last month by 120,000 barrels a day, the most since January, as the central government clashed with the Kurds. That meant Iraq pumped 4.35 million barrels a day in October, below its OPEC target for the first time this year. The uncertainty makes it more difficult for OPEC to judge the global balance of supply and demand next year and make a decision about how long to extend supply curbs.

Despite the challenges, the result to date convincingly defeats many of the superficial claims that “OPEC is dead and production cut won’t work because OPEC members cheat.”

FRANK UZUEGBUNAM