OPEC: Oil Production Deal Still Has Gas in the Tank, For Now

OPEC: Oil Production Deal Still Has Gas in the Tank, For Now
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Major oil producers have seen enough success to stick with their current strategy. Where previous meetings of OPEC and non-OPEC nations were surrounded by uncertainty, all signs suggested that the recent meeting in Vienna would lead to an extension of the current deal cutting oil production. That extension would leave two major questions: How long would the extension run and would an exit strategy be put in place. On Nov. 30, OPEC and non-OPEC producers agreed to extend the deal until the end of 2018, with a review of the duration scheduled for June. The deal will continue, but the strategy for how and when it will end remains murky.

Thus far, the agreement to cut output has served its purpose. Brent crude oil — a major benchmark for global oil prices — hovered around $63 a barrel for most of November. More than that, the deal has been remarkably successful at getting countries to stick to it. Whereas similar deals have historically averaged about 60 percent compliance, this agreement has seen adherence levels above 80 percent and sometimes even over 90 percent. But despite the deal's successes, the oil market is still in a fragile position, and the countries involved have put themselves in a difficult situation.

In Vienna, Russian and Iraqi delegates noted that should oil prices rise above $65 per barrel, producers risk undermining their own success and bringing further momentum to the U.S. revival in shale oil production. If the price becomes high enough, the United States will likely accelerate the production of shale oil. If that happens, the United States will effectively be ceded a portion of the global oil market. Even with prices hovering between $50 and $60 per barrel for much of 2017, U.S. oil production reportedly increased 10.8 percent in the year since OPEC hammered out the deal's framework in September 2016.

The leaders of the deal — Saudi Arabia, Russia and Kuwait — are caught between a rock and a hard place. Most producers, including Russia and Iraq, don't want the cuts to become a long-term production quota and would like to see the deal eventually end. These countries also don’t want to create too much scarcity and drive the price of oil high enough to accelerate U.S. shale oil production. Production deals are never permanent, but bringing a stable end to this one will require care.

With U.S. oil production rising, stockpiles still large and the size of production cuts high, a quick unraveling of the deal could overwhelm markets and cause the price of oil to plummet. Countries will need to find a way to make an organized exit to prevent a free-for-all in global oil markets. This means that although compliance was high in 2017 and the meeting in Vienna brought an anticipated extension, 2018 may not proceed as smoothly. Compliance may begin to decline, and some countries — such as Iraq — will be looking to jump ship sooner rather than later.

A Stratfor Intelligence Report.
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