OPEC limits oil production
A « historic » agreement or just another signal effect?
News: On Wednesday, November 30, in Vienna, the member states of the Organization of Petroleum Exporting Countries (OPEC) reached an agreement to reduce oil production by nearly 1.2 million barrels per day, bringing its production ceiling to around 32.5 million barrels per day. While this agreement has been described as historic by the financial markets, the fact remains that the excitement could fade as quickly as it arose.
This agreement comes after months of dissent within the cartel. Moreover, this production cut is the first in eight years (since the 2008 financial crisis). In the wake of this agreement, oil prices jumped by around 8% for both Brent and WTI. The price of Brent crude has once again exceeded $50, having been anchored below this psychological threshold since October 28. This is the sharpest rise since last February. Since then, the two major New York investment banks, Goldman Sachs and Morgan Stanley, have stated that the price of Brent crude could quickly rise back to $60.
The Vienna agreement is actually the second part of the previous « framework » agreement in Algiers, which was concluded at the OPEC meeting on September 28. The Algiers agreement already provided for a limitation on oil production to achieve a daily output of between 32.5 and 33 million barrels per day. However, the distribution of this production limit had not been addressed, and it is this distribution that the Vienna agreement clarifies. Here are the details of how OPEC members will distribute the oil production limit:
Saudi Arabia: -486,000 barrels per day;
Iraq: -210,000 barrels per day;
United Arab Emirates: -139,000 barrels per day;
Kuwait: -131,000 barrels per day.
At the same time, Iran, which has been back on the international stage since sanctions against it were lifted on January 16, has won its case and been authorized to increase its oil production by 90,000 barrels per day, bringing its total production capacity to 3.8 million barrels per day.
Adding up all these efforts, the reduction amounts to 876,000 barrels per day, leaving a marginal effort to limit production of 324,000 barrels per day. The distribution of these 324,000 barrels per day was not directly addressed in the Vienna agreement. This marginal effort should be borne by the other OPEC members except Libya and Nigeria, which have been exempted from the cartel’s joint effort due to the conflicts they face and their impact on their public and private finances. Indonesia, meanwhile, has had its OPEC membership frozen because the country refused to sign the Vienna agreement.
Outside OPEC, a production reduction effort of 600,000 barrels has been mentioned, half of which is expected to be borne by Russia. The remaining 300,000 barrels per day would be shared among other oil producers that are not part of the cartel, such as Azerbaijan, Brazil, Kazakhstan, and Mexico.
Ultimately, the Vienna agreement brings the oil production limit to 1.8 million barrels per day, with a significant effort on the part of OPEC but also from major oil-producing countries outside OPEC.
Brent price in USD: highlighting the signal effect
Source: BSI Economics
Although the Vienna agreement is historic, there are no sanctions in place for potential violators within OPEC, and we can imagine how difficult it would be to sanction major non-OPEC oil-producing countries if they failed to comply with the still vague commitments set out in the agreement.
The signal effect should be significant and the price of Brent could rebound above the USD 53.4 reached following the Algiers agreement on September 28. USD 60 is therefore achievable, but there is no doubt that the application of the limitations will have to be closely monitored.
Finally, on the macroeconomic front, the rise in oil prices should ease the public finances of the major oil-exporting countries. In addition, global inflation expectations should return to more sustainable levels in the long term, potentially pushing the monetary policies of developed countries towards less easing.
