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OPEC deal may be extended if brings clear benefit

18 April 2018 [16:25] - TODAY.AZ

By Azernews

By Kamila Aliyeva

As the June meeting of the Organization of the Petroleum Exporting Countries (OPEC) is drawing closer, the further extension of the production cuts is a hot topic for discussion in the global oil market. Now the question is whether OPEC will prolong the accord.

The OPEC agreement will be prolonged if there is clear benefit in doing so, Stephen O’Sullivan, a senior visiting research fellow at Oxford Institute for Energy Studies and CEO at TS Lombard Research Partners, belives.

“I think it's impossible to say at the moment [whether the OPEC deal to be prolonged]. We are eight months away from the end of the year and much will depend on what's happening in the oil market as we approach the end of 2018. That's what will determine countries' willingness to cut output and forgo revenue: if they see a clear benefit in doing so,” he said in an interview with Azernews.

Right now we're in a period of global instability which is supportive for oil markets because of concerns over potential supply disruptions - and that's against the background where oil inventories have been falling because of the agreement, according to the expert.

Speaking of the deal’s effectiveness, he stressed that it’s notable that OPEC has met or exceeded its planned reductions in most months while non-OPEC has failed to achieve the planned reductions in most months. 

“So non-OPEC is more talk than action, whereas OPEC is actually taking the strain of the cuts - to everyone's benefit,” O’Sullivan said.

He went on to say that we are unlikely to see a change in the quota at the forthcoming meeting. 

“I don't think we will see a change in the quota at the June OPEC meeting.  What we might see is some progress towards a longer-term agreement (an extension perhaps of the current agreement) between OPEC and non-OPEC rather than a change to the existing agreement when it has only six months to run,” the expert added.

Factors affecting the oil prices in the coming years

O’Sullivan further spoke about the factors which might affect the oil prices in the year to come.

“It's very hard to predict oil prices going forward a few years because there are so many factors which influence them. These include the output reductions themselves, actual or feared supply disruptions for any reason, unexpected changes in demand etc,” he said.

However, it's safe to say that prices will be higher because of the effectiveness of the agreement in cutting total output and therefore reducing oil inventories to lower levels than would otherwise have been the case, according to the expert.

"Better oil prices"

People in the oil market have different views on the idea of “better oil prices” as importers generally want lower prices and would prefer for the agreement to not be that effective so that prices go down, while producers (whether OPEC or non-OPEC) are probably happy with the deal’s results.

Higher oil prices are a tax on oil importers and oil consumers, according to O’Sullivan.

“Generally that transfers wealth from importing nations to exporting nations and the effect of that transfer depends on what the exporting countries do with the extra funds. Higher oil prices also cause countries to accelerate their transition away from oil and towards renewable energy which is likely to be cheaper in the long-run, generated locally (so no supply security issues) and be better for the environment,” he noted.

This transition is happening anyway but the higher the level of oil prices, the more incentive there is for consuming countries to switch away from oil towards other fuels, according to the expert.

On Monday, Kuwait’s Oil Minister Bakheet al-Rashidi said that OPEC and allies will discuss at their June meeting whether to extend the oil production cuts further. Last week, OPEC Secretary General Mohammad Barkindo said that the oil market balance may be achieved in the second to third quarter this year.

OPEC and non-OPEC producers reached an agreement in December 2016 to curtail oil output jointly and ease a global glut after more than two years of low prices. OPEC agreed to slash the output by 1.2 million barrels per day from January 1.

Non-OPEC oil producers such as Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan agreed to reduce output by 558,000 barrels per day starting from January 1, 2017.

OPEC and its partners decided to extend its production cuts till the end of 2018 in Vienna on November 30, as the oil cartel and its allies step up their attempt to end a three-year supply glut that has savaged crude prices and the global energy industry.

Oil prices high due to geopolitical risks

Meanwhile, the prices for “black gold” went up on April 17 due to the fact that investors expect possible disruptions in crude supply due to certain geopolitical risks.

On London ICE (InterContinental Exchange Futures) cost of the Brent crude oil increased $0.10 to trade at $71.52, while the price of Light crude at the NYMEX (New York Mercantile Exchange) went up $0.9 to stand at $66.31 on world markets. At the same time, the price of a barrel of Azeri Light crude oil decreased $0.77 to stand at $73.26.

According to the traders, oil markets have been supported recently due to the risk of supply interruptions, including a potential conflict in the Middle East, renewed U.S. sanctions against Iran and crisis in Venezuela.


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