A landmark 2016 deal on output cuts reached by 24 oil-producing countries can be declared a success. There was a sense of relief and joy as members of a panel monitoring the production cut deal met in Vienna yesterday to assess the progress of the deal. The ministers attending the meeting announced that the agreement has helped clear a supply glut that depressed the market for a long time and as a result oil prices are going up steadily. Oil prices have increased more than 15 percent in the past three months to trade above $56 a barrel and the upward momentum is likely to continue, bringing huge relief to producing countries.
There was plenty of skepticism in the market when the deal was announced in 2016 about its ability to arrest a deep fall in oil prices. There were two arguments: first, the market was suffering from too much glut with the entry of new producers and the increase in output of old members, leading to an unhealthy competition to grab market share, and secondly, there were doubts whether all producers would strictly abide by the deal. The deal itself was not easy to make and was reached after intense efforts and tough negotiations that dragged on for months in which Qatar played a seminal role.
The difficulty was in getting all the major producers on board. Russia, which is one of the largest oil producers of the world, was not an Opec member and Opec succeeded in persuading Moscow to join them. Russian Energy Minister Alexander Novak yesterday expressed satisfaction about the success of the deal and said producers needed a strategy beyond March when the current deal would end. The chances are that the deal will be extended. Having tasted the fruits of collective action, it’s unlikely that producers will go back to their wayward ways which will again push the prices down. Novak summarized the producers’ feeling when he said: “We need not only to keep up the pace but continue our coordinated joint actions in full, but also work out a strategy for the future, to which we will stick starting from April 2018.” Opec, Russia and several other producers have cut production by about 1.8 million barrels per day (bpd) since the start of 2017 as part of the deal.
Producers are currently aiming at a price of $60 a barrel, which is reasonable and achievable. Low oil prices don’t help anyone for two reasons. First, it will lead to a boost in consumption, and thus an increase in pollution. Secondly, the low prices are not always passed to the customers like in India where the government is increasing fuel taxes phenomenally for easy money, thus depriving customers of the price benefit.
