Can OPEC’s recent production cuts rally oil prices? - African Business Magazine
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Can OPEC’s recent production cuts rally oil prices?

Can OPEC’s recent production cuts rally oil prices?

In June 2014, crude oil prices began to fall, reaching an all-time low of about $20 per barrel in 2016. This price fall was a direct consequence of the global commodity surplus, caused by Saudi Arabia turning on the taps in response to shale production in the US.

Arguments around the necessity of controlling the plummeting price and how to do so led to divisions within the Organisation of the Petroleum Exporting Countries (OPEC). The ensuing arguments among the member states over production cuts were coloured by political rivalry and geopolitics.

They included issues such as the impact of supplies beyond OPEC’s control (mainly US and Russian), whether to countenance pleas for exemption from nations such as Iran (which was increasing production after decades of sanctions) and Nigeria (which was battling forced production losses from militant activities).

Vulnerable African economies

At the same time, OPEC’s internal divisions and inability to reach a consensus was hurting some African member countries for particular reasons. This stems from the fact that the majority of Africa’s oil producing economies are also mono economies, which makes them very susceptible to the boom-bust cycle of global commodity prices and often slows national and regional economic growth.

Economies such as Nigeria went into full recession as a consequence and Angola sought financial aid from the IMF in 2016 to help combat dwindling cash flows.

For about two years, OPEC’s bickering went on with no consensus in sight, while the downward spiral in the adversely affected African economies continued.

OPEC’s indication that production cuts would be top of the agenda in the 30th November 2016 meeting in Vienna signalled some hope for the year 2017. But beneath the optimism was the palpable fear of how OPEC could influence the necessary production cuts by non-OPEC members, given the total absence of any structured channel for dialogue with them.

Consensus at last

The November meeting was successful. OPEC finally agreed on production cuts on the lines of a deal agreed in Algiers in September.

The post conference statement said OPEC had decided to implement a new production target of 32.5m barrels per day for its members, “in order to accelerate the ongoing drawdown of the stock overhang and bring the oil market rebalancing forward.”

This agreement was to be effective from 1st January 2017, but prices rallied immediately after the announcement, buoying the hope of expectant African countries. However, many months of global oversupply has led to high inventory levels in a number of markets, which could slow the impact of the production cuts until second quarter of 2017.

With the consensus reached and its potential already visible on the horizon, the questions of compliance and the essential control of non-OPEC supplies became paramount. The post-conference statement said: “The Conference has agreed to institutionalize a framework for cooperation between OPEC and non-OPEC producing countries on a regular and sustainable basis.

The Conference underscored the importance of other producing countries joining the agreement.” On 10th December 2016, 10 days after the Vienna agreement, OPEC announced an unexpected and unprecedented deal with non-OPEC oil-producing countries to cut production. The deal will reportedly eliminate 600,000 b/d from these sources.

Positive outlook

Will the gains in oil prices last and what is the implication for African economies in 2017? The overall outlook for oil and gas prices in 2017 seems positive, but that is based on several uncertain assumptions, which include OPEC and non-OPEC compliance on managed production and the projection that global oil demand will rise by about 1.2m b/d in 2017.

OPEC’s post conference statement observed that “non-OPEC supply is expected to contract by 0.8mb/d in 2016 before returning to growth of 0.3mb/d in 2017” and that “world oil demand is anticipated to grow at healthy levels of around 1.2mb/d in both 2016 and 2017.” If these happy forecasts are realised, prices will rise.

Ironically, rising prices are the single most important motivation for US shale producers and when they return to the market following price gains, another period of glut may be expected. Nigeria’s OPEC quota is presently 2.2m b/d, while 2016 production averaged 1.65m b/d due to insurgency in the country.

If it reaches the allowed 2.2m b/d in 2017, which it already has the capacity to do, that will bring an additional 550,000 b/d to the market. Similar data could be seen in other countries that were exempt from cuts (Libya and Iran). While their individual production quotas may be relatively small, they could aggregate to become significant enough to influence global oil prices negatively, especially if there is widespread cheating across the producing countries that are parties to the production cut agreement.

Estimating the impact

Whether the projections stay positive or not will be crucial for a number of African economies and indeed the entire region. Consequently, when OPEC meets again in Vienna on 25th May, African member states will count their costs. Questions will be asked on the impact of the production cuts, OPEC’s capacity to regulate global oil prices and the economic future of many African countries.

Chijioke Mama

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Written by African Business Magazine

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