OPEC reaches deal, what's next?

OPEC reaches deal, what's next?

Baku, Azerbaijan, Sept. 29

By Aygun Badalova – Trend

While the agreement has been reached by OPEC members to cut the oil output, there is still much work ahead in fulfilling the deal.

The group at the informal meeting on Wednesday agreed to cut down the oil output to 32.5 million barrels per day (bpd) from current production of 33.24 million bpd.

How much each country will produce is to be decided at the next formal meeting of OPEC in November.

Cyril Widdershoven, Middle East geopolitical specialist and energy analyst, partner at Dutch risk consultancy VEROCY and SVP MEA-Risk, believes that based on the current geopolitical and economic situation in OPEC member countries, the only way to regain part of revenues is to put in stone the agreement.

“We will need to take into account that there will be some hard nuts to crack, such as production caps for Iran, production cuts for Saudi Arabia, UAE, Kuwait and Bahrain, removing around 1-1.5 million bpd by the end of 2016,” Widdershoven told Trend.

He also noted that hardline stand of Iran is not having the same support anymore from former pro-Iranian hardliners, such as Venezuela, Ecuador, Gabon and Algeria. All these countries, he said, have openly asked for production cuts as their economies are in shambles, while production is also under pressure.

The expert believes the main issue to look at present is the geopolitical issues between the Arab OPEC members, led by Saudi Arabia, and Iran-supporters (Iraq).

“The growing influence of Iran in the Arab world, especially Iraq, Yemen and Syria, is not supporting a more flexible approach by Saudi Arabia, UAE and Bahrain. However, all economies have been hit hard, stability in the market is needed, as the old strategy of squeezing out shale oil and Russia is taking longer than anybody expected,” Widdershoven.

Saudi Arabia’s Energy Minister Khalid al-Falih said on Tuesday that Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense" as part of any output limits which could be set as early as the next OPEC meeting in November, Reuters reported.

With regard to the possibility of other large oil producers to join reached agreement, Widdershoven said he does not expect full support of non-OPEC producers in the short term.

“Russia and the US are not currently looking for production cuts, even that both are feeling the heat of low prices. Russia is totally in shambles, but based on the current Putin approach, they can survive for a longer period of time,” he said.

Shale oil US is the current swingproducer, according to the expert.

“When prices are lower than $48-50 per barrel no additional production could come on stream quickly. However, if prices are going above $50 per barrel new production could come onstream if financing is there (this is a major unknown, as former financials in the US will not be straight away enticed to return into the market in full). It is however to be expected that Saudi Arabia and Iran have been talking behind closed doors with Russia and Brazil, Canada,” Widdershoven said.

Touching upon the effect the agreement will have on oil prices, Widdershoven noted that when looking at current market fundamentals, it is still a bullish market.

“Optimism about Libya and Nigeria is built on loose sand. Libya is again heading towards implosion, as the current UN/US-EU backed government is again in shambles and General Haftar is gaining ground. Nigeria's Niger Delta is still critical, new fighting to be expected. At same time, Norway strikes are imminent in the oil sector, cutting production for a possible long time. In South America, large cuts in capital spending of Petrobras Brazil will have its negative effect, while US inventories are also heading towards lower level,” Widdershoven said.

“EIA’s optimism about production improvements and higher production still depend on the willingness to finance projects. China’s oil production is much lower than anticipated, while Venezuela is heading for a total shutdown. India also announced to increase its overall strategic petroleum reserves in the next months,” he added.

He noted that prices are to be expected to increase, “hopefully slowly but steadily”.

“Possible end 2016 could be based on current situation around $50-55 per barrel, but taking instability in major producing regions, this could be even higher. Upwards potential is still to above $60, but will depend on financials shale oil US,” Widdershoven said.

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