Opec has finally taken a decision. For the doubters who were quick to announce the death of Opec, it's a disappointment. For the well-wishers of Opec, it was a triumph.
However, the proof is in the pudding: Opec must now actually deliver. A cut of 1.2 million barrels per day is what the market was really looking for. Russia's pledge of another cut of 300,000 bpd is shaping to be a grand decision. Finally, the Russians have come to the table. The oil price has rallied and will probably stay at current levels until the cuts come through and markets begin to feel them.
Compliance is the big question that Opec and Russia will have to deliver on. The deal will have to hold together for many months and inventories will have to show it to help oil prices stay above US$50 a barrel with confidence and possibly cross $60 a barrel.
Further, Opec will have to stick to its decision with evidenced supply cutbacks well after May (the organisation will revisit its decision again in May).
What will be interesting to observe is the role of how US oil producers will react. Higher-cost producers, like some US shale drillers, have not been displaced since 2014. Most were able to restructure their companies, cut costs, becoming more efficient producers by using new drilling methods, etc.
The US capital markets have helped American E&P (exploration and production) companies stay financially afloat, which, in turn, has helped oil companies combat the lower-cost Opec producers. The higher oil price means stocks and bonds of Opec’s rivals will rally, which will be a boon in the interim, as well. That could provide financial impetus to continue for longer.
Opec’s move to cut production will have to stay on course and non-Opec countries such as Russia will have to do their part for the conventional producers to keep their credibility. The oil price recovery will be a discovery price process that hasn’t yet been tested. As conventional oil producers are trying to survive, they could very well be helping others stay afloat.
John Sfakianakis is the director of economic research at the Gulf Research Center in Riyadh
business@thenational.ae
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