Baku, Azerbaijan, Oct. 5
By Elena Kosolapova – Trend:
Non-OPEC countries will unlikely join OPEC’s agreement to cut oil production, reached late September, and could try to benefit from the situation, says Erkal Ersoy, assistant professor and co-principal investigator at Heriot-Watt University’s Center for Energy Economics Research and Policy.
“The risk with a coordinated production cut is always that rising prices could benefit other producers. For the cut to have a substantial effect, non-OPEC producers would need to refrain from accelerating production as prices inch higher,” Ersoy told Trend Oct. 5.
Last week OPEC agreed to cut its oil output for the first time since 2008. The group plans to reduce 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, when an invitation to join cuts could also be extended to non-OPEC countries, such as Russia.
Ersoy believes that at the moment there is no reason to think that other countries would commit to such an agreement, and US onshore Lower 48 producers could benefit the most.
“If OPEC did reduce production, the real question is whether non-OPEC producers – and stock draws – would make up for the difference. If so, oil prices could stay put. If not, we could see an upward tendency in prices. In the current climate, the former seems more likely,” Ersoy said.
However, the expert noted that OPEC agreement has a vague nature, reminding that individual member countries of the cartel have not formally agreed to a freeze level.
“Moreover, Iran, Libya and Nigeria, the three countries exempt from the freeze, are all looking to increase production due to various reasons, such as lifting of economic sanctions from Iran earlier this year and recent damage to petroleum assets in Libya and Nigeria in terrorist attacks. Due to these reasons the overall effect of the agreement on OPEC production is unclear,” Ersoy said.
“A successful supply cut would put an upward pressure on prices as the market readjusts to a new equilibrium. However, it is difficult to tell whether this will happen until OPEC’s November formal meeting,” the expert noted.
On Wednesday afternoon the cost of the December futures for Brent crude oil increased by 1.69 percent to $51.74 per barrel and November futures for WTI rose by 1.68 percent to $49.51 per barrel.