But will it stick?

Malcolm Latarche
Malcolm Latarche
ShipInsight

01 December 2016


Tuesday's OPEC agreement to cut oil production with some non-OPEC members such as Russia apparently also agreeing to curb output has had an immediate effect on crude prices which increased almost 10% on the day pushing Brent crude comfortable over the $50 mark. That will no doubt please the offshore sector but may not be so well received by the tanker operators who will likely see some vessels released from storage duties and less cargoes on offer. The path to profit for OPEC may not be as smooth as initial reaction suggests. Firstly, the price rises follow some significant falls in recent days when prospects for a deal looked less rosy for example, despite today’s increase Brent crude is still below what it was trading at for most of October. Then there is still a full month to go before any cuts come into effect which gives plenty of time for some backsliding to occur. Then there is the prospect of a US interest rate rise that could make for a stronger dollar and some downward pressure on prices. Another factor that will come into play is that as the price of crude rises so US shale production will become viable again and no doubt that also will have a downward effect. Although it looks as if this year will see oil prices at or near the $50 level, it would be a brave man that would gamble on that sticking for the whole of 2017. Determining why OPEC has suddenly changed tack is not as easy as it may seem. For sure the low price has hurt economies of some OPEC members but there have been recent output reductions in Nigeria and Libya without any actual agreed cuts and as these have not pushed up prices, then will an OPEC cut have much more effect now that these problems have been resolved? The brunt of the 1.2million barrel reduction will fall to Saudi Arabia and its near neighbours excluding Iran which has been let off lightly under the quotas. Saudi has a good reason to welcome anything that will push up crude prices not so much for the income it will bring but because it makes the country’s sale of shares in Saudi Aramco much more attractive. It may be no coincidence that the production cut comes just two weeks after reports of top financiers descending on Riyadh to discuss the sale likely to Take place next year. Some analysts are saying that Saudi’s past reluctance to agree to cut production was due to a desire to kill off the US shale sector but they cannot be so naïve as to think that once prices went back up, shale production would also come back. There is probably more truth in the idea that the Saudis feared being left with worthless oil if the idea that between 66 and 80% of all fossil fuels would need to stay in the ground to prevent a 2° C rise in world temperatures ever translated into concrete action by governments. Despite the Paris agreement at COP21, it would seem that the election of Donald Trump could well herald a reversal of recent political trends as governments are forced to take more account of the immediate economic concerns of their electorates or face being unceremoniously dumped for concentrating on other matters.