OPEC To Stay in the Game in 2018, Won't React to Short Term Disruptions

by Ship & Bunker News Team
Monday January 8, 2018

The end of 2017 had many analysts speculating that the Organization of the Petroleum Exporting Countries (OPEC) might abandon its commitment to the extended output cuts by mid year due to a host of factors - but just one week into the new year sees Julian Lee, oil strategist for Bloomberg, convinced the cartel will stay put.

In his latest column for the news agency, Lee discounted the argument that widespread cheating on the part of members will cause the deal to collapse: he pointed out that many of the habitual cheaters "are already producing at, or very close to, full capacity" and that any intended further rise will take a long while to achieve.

Lee went on to discredit the notion that Russia will back out of the agreement, because a re-elected president Vladimir Putin doing so "could endanger the arms and investment deals signed during the [Saudi Arabia] king's visit to Moscow and weaken Russia's burgeoning influence in the Middle East."

The analysts also noted that quitting in the face of surging U.S. shale output "would also be a very difficult step for OPEC to take: it would be a huge personal blow to Saudi oil minister Khalid Al-Falih and to Crown Prince Mohammed Bin Salman, the architects of the policy."

Meanwhile, it seems OPEC is taking geopolitical tension a lot more calmly than jittery traders: on Monday a source from the cartel told Reuters that while it is monitoring developments in Iran and other regions closely, it is not inclined to sway from the provisions of its output reduction deal.

The source said, "Even if there was a supply disruption (from Iran or Venezuela)... OPEC will not raise output.

"OPEC's policy is to bring inventories down to their normal levels and will stay the course, unless the disruption in supply of something like 1 million barrels per day persists for more than a month, and causes shortages of crude supply to consumers."

The source added that global inventories remain above their five-year average and much more time is needed to drain them: "Any change in production limits must be driven by a change in market fundamentals and not just speculations for a short period of time, for OPEC to change the output ceiling."

One emerging line of analytical thought with regards to OPEC is that it is being too efficient in its cutbacks: John Kemp, market analyst for Reuters, recently argued the cartel "is more likely to tighten the oil market too much and allow prices to overshoot on the upside rather than relax production cuts too early and risk prices falling back."