OPEC Agrees On An Output Cut Deal

opec
Financial markets relieved by the OPEC deal 
In eight years OPEC had never managed to reach an agreement on an output deal. Finally, contrary to our expectations, a deal has been struck. Indeed, we believed that the fundamental differences regarding production would not be solved at this meeting for some specific reasons especially since the dominance of Saudi Arabia is more challenged by Iraq and Iran. This is still even truer since the Trump’s election. This deal seems to us very imperfect and there are several things to say about it. We consider that the real impetus was saving OPEC’s credibility. After eight years of disagreement, an image of mistrust between members could have posed a major risk to the reputation of the intergovernmental organisation. That said, markets appreciated the deal, and even Russia, a non-OPEC member, also agreed to cut its production by 300’000 barrels a day. As a result, a barrel of Brent increased by 10% and closed above $52
Assessing what OPEC oil deal can deliver
In a recent report, we also highlighted Iraq and Iran’s growing challenge to Saudi Arabia’s dominance in the cartel. This challenge is now all the more obvious following Tehran’s decision to not cut its output, which it actually raised to 3.8 million barrels a day – not exactly what Saudi Arabia had in mind from its neighbour. This is a significant victory for Iran which has lost market shares due to Western sanctions. Oil inventories remain very large and we believe that the cut decided at the meeting is likely not to be sufficient to balance demand and supply. The output should be reduced by 1.2 million barrels per day starting in January. We remain nonetheless suspicious on whether the cut will be effective or not.
The OPEC deal is definitely not a strong agreement and for the time being, markets are largely in surplus and more would be needed in the medium-term to absorb the production. Unlikely winners are US Shale gas producers, which are now expected to rise in the medium-term.
Opec doesn’t hold all the cards, even after its oil price deal
Regards All.
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