After a very difficult year full of tensions and discussions among its members the OPEC finally has reach an agreement, but this production agreement rises questions regarding the market and prices in the upcoming months. What does it means the new OPEC production agreement? Could the OPEC make a real and lasting difference in oil prices for 2017 or the shale oil producers and does outside the organization will keep the surplus and the prices around 46usd/barrel?
The very first thing we have to do is review what this agreement means. In its november 30th press release the OPEC explains how the market is experiencing volatility and unbalance mainly from the supply side. Given that the organization reach an agreement in order to cut production by 1.2 millons of barrels per day and attempt to stabilize the price, establishing specific reductions per member.
Its important to note that this is not a permanent agreement, it establishes a 6 months period which can be extended other 6 months according a market tendency and levels revision. It will also had a special comitee whose function will be to supervise the member’s compliance.
So, now that we know how the agreement will work the second question remains, could it generate a lasting effects in prices? If we think in economic terms a supply reduction will generate an increase in prices because it made goods scarcer and more valuable, however this only happens when the change is large and permanent enough. In other words this agreement will only have a marginal effect if the OPEC can’t widen its scope and include the US and Russia which currently are producing more than the biggest OPEC member, Saudi Arabia.
According to OPEC´s November Oil market report the oil supply for 2016 of non-OPEC countries will be 56.2 millions barrels per day, if we add the 31.2 millions produced reported in the conference press release we are talking about 87.4 millions total production in the world, which means that OPEC only controls 35.7% of the world production. Of the other 65%, US and Russia represents 12% and 15% with 11 and 15 millions barrels per day each one. Additionally, in the same report the OPEC’s has a non-OPEC production projection of 56.67 million barrels fir 2017 first quarter, which is very similar 2016’s.
As I already said it at this post a supply reduction will rise prices by making scarcer a good, but this is accomplished only if the supply is really less than before, what I’m trying to say is if the OPEC reduces its production but this place gets fill by the US Shale Oil, or Russia producers, the only effect of the agreement will be to lose market participation which in my view is a very likely scenario. So if you are waiting for oil prices above 60usd/barrel in 2017, think again.
*If you want to check the OPEC report: http://www.opec.org/opec_web/static_files_project/media/downloads/publications/MOMR%20November%202016.pdf
*This post reflects the author opinion and must be taken as an investment recommendation.