On late Wednesday, September 28, OPEC announced an agreement of sorts to reduce its production by roughly 250 to 750 kbd to its overall combined production mbd, where kbd and mbd represent thousands of barrels per day and millions of barrels per day respectively.
The Conference, following the overall assessment of the global oil demand and supply balance presented by the OPEC Secretariat, noted that world oil demand remains robust, while the prospects of future supplies are being negatively impacted by deep cuts in investments and massive layoffs. The Conference, in particular, addressed the challenge of drawing down the excess stock levels in the coming quarters, and noted the drop in United States oil inventories seen in recent weeks.
The Conference opted for an OPEC-14 production target ranging between 32.5 and 33.0 mb/d, in order to accelerate the ongoing drawdown of the stock overhang and bring the rebalancing forward.
The Conference decided to establish a High Level Committee comprising representatives of Member Countries, supported by the OPEC Secretariat, to study and recommend the implementation of the production level of the Member Countries. Furthermore, the Committee shall develop a framework of high-level consultations between OPEC and non-OPEC oil-producing countries, including identifying risks and taking pro-active measures that would ensure a balanced oil market on a sustainable basis, to be considered at the November OPEC Conference.
This agreement is an agreement to agree, which might prove very difficult to effect. Moreover, I am not sure which, if any, OPEC countries, will be exempt from production cuts. If there are exempt OPEC countries, will their future production overwhelm the agreed cuts? Saudi Arabia typically reduces its production as the summer ends and autumn starts. Assuming this planned production cut is part of agreed cut, what is the effective production cut? If prices should rise to nearly or above $50 per barrel, will other higher cost producers step in and threaten OPEC’s market share? Until we have more clarity by way of a final agreement and see how other OPEC and non-OPEC producers respond, I will remain cautiously optimistic.
Here are some other articles, from subscription sources, that you might find helpful:
- “Saudi Oil Minister Offers Hope on Output Curb at November Meeting” (Wall Street Journal);
- “Opec agrees on need for output cut” (Financial Times);
- “Opec agreement to cut oil production faces array of hurdles” (Financial Times);
- “Iraq Quarrel on Production Number Could Sink OPEC Deal” (Wall Street Journal); and
- “Why OPEC’s Prospective Deal May Not Create a Lasting Oil Rally” (Wall Street Journal).