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Home News Oil price rally slows on doubts over OPEC output deal

Oil price rally slows on doubts over OPEC output deal

Published on 29/09/2016

An oil price rally fuelled by OPEC's deal to cut crude output ran out of steam Thursday with analysts doubting the cartel's ability to seriously tackle a supply glut.

Following a meeting that included Russia, the Organization of the Petroleum Exporting Countries stunned markets Wednesday by saying it planned to trim total production by some 750,000 barrels per day.

This followed talks in Algiers as world oil producers seek ways to prop up prices that have plunged from $100 in 2014 to near 13-year lows below $30 at the start of 2016, mainly owing to excess supplies.

“We are confident that OPEC countries will not stick to the agreement,” commented Commerzbank analyst Carsten Fritsch.

But even if they do, exemptions from cuts granted to Iran, Nigeria and Libya mean that “the problem of surplus will not be solved if these countries take full advantage of their capacities again”, Fritsch said.

Exact details of the deal remain to be agreed and analysts said markets will now wait to see whether non-OPEC producers such as Russia, the United States and Canada will make cuts of their own.

In a reaction Thursday, Russian Energy Minister Alexander Novak said that his country intends to keep oil production at current levels.

Wednesday’s deal came after OPEC kingpin Saudi Arabia allowed bitter rival Iran to be exempted from the cutbacks, as the Islamic republic recovers from years of sanctions on its oil exports.

The cartel’s announcement of a first official reduction in eight years at first sent crude prices surging six percent Wednesday, while energy firms across the globe have seen their share prices soar.

But early Thursday the oil price slipped lower again, before showing slight gains by the late European afternoon.

The US benchmark oil contract, West Texas Intermediate for delivery in November, was up 27 cents at $47.32 a barrel.

Brent North Sea crude for November rose 19 cents to $48.88 a barrel compared with Wednesday’s close.

– Saudi ‘blinks first’ –

“OPEC’s commitment to cut output by between one-half and three-quarters of a million barrels a day has done more for oil-sensitive stocks and currencies, as well as overnight risk sentiment, than for oil prices themselves,” Societe Generale said in a note to clients.

“Time will tell whether oil prices will trend higher (after a knee-jerk rally), and the market will first wait to see how the cuts are divvied up between members, which will be decided at the November OPEC meeting.”

At the end of six hours of negotiations and weeks of horse trading, OPEC said it would cut production to 32.5-33 million barrels per day from around 33.5 million in August.

“It is Saudi Arabia who has clearly blinked first, allowing Iran, its main rival, to ramp up production,” said Jeffrey Halley, senior market analyst at Oanda trading group.

“We shouldn’t underestimate the major shift by Saudi Arabia,” he told AFP. “These two don’t see eye to eye on anything so this is a huge concession by Saudi Arabia to ‘lubricate’ the process.”

Saudi Arabia and Iran, the Middle East’s foremost Shiite and Sunni Muslim powers, are at odds over an array of issues including the wars in Syria and Yemen.

The Paris-based International Energy Agency called the agreement “an important development for the oil market”, but it also cautioned that it was too early to tell how it would actually affect market balances.

“The IEA continues to believe that oil prices should be determined by market fundamentals,” it said.

– ‘Tipping point’ –

The cartel’s richer members, particularly the Gulf states, have preferred to battle it out with non-OPEC producers such as the United States for global market share by keeping production high.

“Saudi Arabia have perhaps reassessed their dumping oil strategy to put US shale out of business as the pressure on their budgets has clearly reached a tipping point as well,” Halley added.

The plunge in oil revenues has left Saudi Arabia with a record deficit last year, prompting the country to cut the salaries of cabinet ministers and freeze the wages of lower-ranking civil servants.