OPEC still has role despite changing global dynamics

Contrary to speculations, OPEC’s days are far from numbered. While global oil market dynamics may have changed, the Organisation of Petroleum Exporting Countries has proved that it still has a role to play.

Crude oil prices fell under $30 a barrel for both Brent and West Texas Intermediate in 2016 prompting the oil cartel to reach out to major non-OPEC oil producers instituting in January 2017 a production cut deal meant to take out about 1.2 million barrels per day (bpd) from the market.

Despite initial doubts and concerns, the deal has worked leading to multiple extensions. The Organization of Petroleum Exporting Countries, Russia and other non-OPEC producers extended the pact until the end of 2018, with Khalid al-Falih, Saudi Energy Minister recently hinting that the curbs would need to continue into 2019 to reduce global inventories.

Commercial oil inventories held by OECD countries fell to 2.855 million barrels in February. OPEC and its allies in a production cut agreement have said they are aiming to reduce OECD commercial stocks to the five-year average, though they have been mulling other benchmarks to gauge the success of their cuts.

Compliance rate keeps increasing. OPEC and its allies achieved 138 percent of pledged output reductions in February 2018, up from 133 percent in January and the highest since the deal aimed at clearing a glut began in January 2017.

Currently, OPEC officials are drafting a document that would institutionalize the engagement with Russia and the other deal participants, though they have offered no specifics on what such a pact would entail.

Trade war fears is also lending a helping hand to the oil cartel. Oil prices rebounded due to growing tensions between the Trump administration and China regarding tariffs and the increasing likelihood of a trade war. The Trump administration recently announced plans for a variety of tariffs targeting an estimated $60 billion worth of Chinese goods. The move was met with a stock market selloff, which also dragged down crude oil.

Also, the market found support from rising Middle East tensions. Saudi air defences shot down seven ballistic missiles fired by Yemen’s Iran-aligned Houthi militia, some of which targeted Saudi capital Riyadh.

FRANK UZUEGBUNAM