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OPEC meets in Kuwait to discuss extending 2016 output cut

On March 25, a joint committee was held in Kuwait between the ministers of both members and non-members of the Organization of Petroleum Exporting Countries. The goal of the meeting was to decide whether the 2016 agreement to limit the supply of oil should be extended by another six months.

The committee was headed by Kuwaiti Oil Minister Essam Al-Marzouq and consisted of OPEC members Algeria, Kuwait and Venezuela, in addition to non-OPEC members Oman and Russia.

OPEC is a cartel consisting of the world’s 13 major oil exporting nations. A cartel is a collection of otherwise independent businesses or countries that act as if they were a single producer and are therefore able to fix prices for any goods or services they provide with little or no competition. Since OPEC is composed of some of the greatest oil exporting countries in the world, it holds a disproportionate amount of oil and natural gas reserves, currently possessing 80 percent of the world’s crude oil reserves and nearly 50 percent of natural gas reserves. As a result, OPEC has a large influence on the oil market, which allows it to keep oil prices high to reap profits and maintain its share in the global market to preserve influence.

To increase the price of oil, Saudi Arabia convinced the rest of OPEC’s members and non-members to agree to cut the production of oil in late 2016. The OPEC members were expected to cut production by 1.2 million barrels a day and non-OPEC members by 600,000 barrels a day, for a total of 1.8 million barrels a day.

This deal was particularly important to Saudi Arabia, as a plan titled Saudi Vision 2030 had just laid out its goal of remaking its oil-dependent economy into an economy that is more diversified. Under this plan, Saudi Arabia would raise its share of non-oil exports in non-oil gross domestic product from 16 percent to 50 percent. Additionally, the plan would include  creating more jobs in its mining sector, creating quality tourism attractions, localizing the country’s renewable energy and industrial equipment sectors, making it easier to apply for visas and increasing funding of digital infrastructure, culture, education and the military. The plan also sought some other economic goals, such as increasing women’s participation in the labor market and reducing the unemployment rate.

The irony inherent in Vision 2030 is that to move away from reliance on oil and make headway in diversifying its economy, Saudi Arabia would need to sell more oil. Prince Mohammed had previously stated to reporters that, “We can achieve this vision even if oil is lower than $30. We think it is almost impossible to go under $30 because of global demand.”

However, Saudi Arabia and other OPEC countries depend on high revenue from oil to engage in new projects. If the agreement is not extended, the countries will have to diversify their economies with the lower price of oil in place.

There was a recent 10 percent drop in oil prices amid signs that the worldwide supply of oil might not actually be decreasing. Investors have also raised doubts about OPEC’s extension of the previously mentioned oil-reduction agreement of 1.8 million barrels per day for the coming months. Additionally, Brent crude, a major benchmark price for oil worldwide, temporarily dropped below $50 last week. The price of oil could drop even further because of increased U.S. output in recent months and doubts concerning whether the reduction agreement would achieve a high level of compliance among OPEC member and non-member countries.

A common sentiment among investors seems to be that extending the OPEC deal will probably happen.

“Without the production cut agreement, I think you could basically target the low-to-mid $30s. I’m of the mind they extend it,” said Gene McGillian, manager market research at Tradition Energy.

Helima Croft, global head of commodity strategy at the Royal Bank of Canada, further stated, “Do they really want to flirt with the $30s? Is that something that’s going to enhance their ability to lead in one of these petrostates?”

The OPEC members and non-members will be eager to extend the deal because of their own domestic concerns. Recently, an OPEC source, referring to a report released by a committee monitoring the output reduction, said that commitment within OPEC was near 86 percent concerning the reduction agreement.

When the agreement between OPEC members and major producers of oil was first enacted in December 2016, the price of oil had stabilized around $50 for weeks. In January 2017, Brent crude was trading at around $58 a barrel. The extension of the 2016 agreement to cut the production of oil by 1.8 million barrels per day will raise the price of oil back up to a comparable level and give these petrostates the funds necessary to build infrastructure and diversify their economies.

April 3, 2017

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