Freezing Oil and Heating Prices

Reinstating victory will be a challenge for oil producing nations.

In an internationalised world, there is restoration of victory and loss on a perpetual mode. The OPEC deal has reinstated just that. In the deal stricken last week, the most significant part of the agreement was the cut in oil production, to 32.5 million barrels a day. While there have been winners and losers on the OPEC and non-OPEC front (respectively), there is more to the deal than that.

The decision of abated oil supply showed immediate effect on international crude oil prices, which were up by 6 percent. However, the effect did not seem to last long, thanks to sustained efforts by non-OPEC economies in production, as an outcome of economies of scale, standardisations and higher efficiencies on the operational front. While this is the global scene on crude oil supply, there are several internal ramifications possible, when production is proportionally allocated to the members of OPEC. Market share for one, is something that no OPEC member is ready to sacrifice in the face of lesser production. Decreased revenues in the medium term is another paramount opportunity loss.

One of the first economies to benefit from the production cut is perhaps Iran, the reason being that the economy is allowed to produce “maximum levels that make sense”. Just as the rest of the OPEC members were prepping for the deal, Iran sold 2.8 million barrels per day, in September this year. This is perhaps much lesser than what the economy sold before its continuum of energy sanctions. Perpetuating oil production and sales seems no more a mightier objective for Iran. Along with Iran, Iraq has been another beneficiary of the deal, Baghdad taking a bolder step. Libya also stands to benefit from the no freeze pact agreement in the OPEC deal.

Whether the deal is a true step to stabilize oil prices, is a scenario yet to be witnessed. Though a counter-proportional rise in oil prices happened temporarily, supply has only improved or remained principally unchanged. On the same note, Saudi Arabia, the world’s largest oil producer, which would not curtail its production (because of capping), will perhaps not be affected as much. The economy’s production and sales are seasonal, and it will perhaps be the case even after as a consequence of the OPEC deal. The other side of the story consists of non-OPEC nations that are striving hard to maintain supply, in order to reap benefits of trade and revenue. Shale companies in the US have already resorted to hedging against further decrease in oil prices. Such moves represent fundamentally defensive behaviour by oil producing entities, which may or may not affect global oil prices to a large extent. Long term or medium term effects on oil prices will depend on the November meeting.

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  1. The OPEC Deal May Tell A Different Story – The Radical Economist

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