Even if OPEC increases quota, it can lead to lower prices

Oil&Gas Materials 14 August 2017 10:35 (UTC +04:00)

Baku, Azerbaijan, Aug.14

By Leman Zeynalova – Trend:

Even if OPEC does cut output by more, it may simply lead to lower prices in the long term, Tom Pugh, the economist at British economic research and consulting company Capital Economics, told Trend.

Earlier, Saudi Arabia’s Minister of Energy, Industry and Mineral Resources Khalid Al-Falih said that OPEC and non-OPEC countries party to the output cut agreement can consider the possibility of increasing the production cut quota, which is currently 1.8 million barrels per day.

“It is possible for OPEC to deepen its cuts, but almost anything is possible. I think it’s unlikely that OPEC will deepen its cuts. Partly because it will be extremely difficult for the group’s members to agree on how to distribute any further cuts. Reopening the cuts for discussion is like opening a can of worms, Iraq and Iran would probably want to increase their quotas whilst it seems unlikely that many countries would volunteer to cut their output further,” said Pugh.

The expert believes that the burden of any further cuts would probably fall on Saudi Arabia.

The non-OPEC members of the pact would also have to agree to further cuts, but is not clear that they would be willing to participate, he added.

“If, a big if, OPEC did manage to agree to deepen its cuts, this would probably support oil prices in the short term, of course by how much depends on how much they cut. However, higher prices in the short term are likely to encourage further increases in non-OPEC production which will weigh on prices in the future. So even if OPEC does cut output by more it may simply lead to lower prices in the long term,” said Pugh.

On May 25, OPEC member countries and non-OPEC parties, Azerbaijan, Kingdom of Bahrain, Brunei Darussalam, Kazakhstan, Malaysia, Mexico, Sultanate of Oman, the Russian Federation, Republic of Sudan, and the Republic of South Sudan agreed to extend the production adjustments for a further period of nine months, with effect from July 1, 2017.

The reductions will be on the same terms as those agreed in November.


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