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OPEC Deal Drives Oil Prices Above $50 Per Barrel…For Now

December 2, 2016
Reading time: 2 minutes

https://en.wikipedia.org/wiki/Extraction_of_petroleum

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https://en.wikipedia.org/wiki/Extraction_of_petroleum
Wikipedia

The industry that once counted on world oil prices in the range of US$100 to $120 per barrel declared at least a temporary victory this week, when the Organization of Petroleum Exporting Countries (OPEC) and Russia agreed on a temporary production cut that sent prices as high as…nearly $54 per barrel.

“The oil club is dizzy with its own success after a harmonious meeting in Vienna, where it surprised the world by agreeing to its first production cut in eight years,” Bloomberg Markets reports. “Oil prices up 10%? Check. Saudi Arabia and Iran in agreement? Check. OPEC and Russia working together? Check. After being left for dead, OPEC pulled it off once again.”

But it’s a measure of how far oil has fallen since 2014 that most analysts were in such a celebratory mood after seeing prices close as high as $53.94 per barrel, with fossil watchers at Goldman Sachs and Morgan Stanley predicting a high of $60. The more sober reality, Bloomberg notes, is that “there are many reasons not to get too delirious about the agreement to curtail output by 1.2 million barrels a day, the most prominent being the cheating of OPEC’s own members.”

The deal is expected to bring prices high enough to trigger new project approvals by fossil giants like Exxon and Total SA. But Bloomberg warns that Iraq, Iran, Venezuela, and Angola have only limited enthusiasm for voluntary production cuts, and other news reports have suggested Russia could also walk away from its promises once prices rise.

The agreement ultimately depends on what Bloomberg calls “self-compliance”, and IHS Energy director Spencer Welch notes that “disagreements persist among OPEC members on how to measure production, so the deal will be hard to police.”

The investor confidence behind the price jump is based on the expectation that OPEC will set quotas more effectively now than the last time it tried, when members exceeded their caps for 20 months out of 24, Bloomberg notes. “We’re moving higher on optimism that the cut, together with expected growth in global demand, will bring the market into balance,” said Tradition Energy market research manager Gene McGillian. But once you step away from conventional energy futures models that largely ignore the revolution going on in distributed energy and energy storage, it’s hard to see how a new project approved today will benefit from higher prices over its operating life: over the last several months, Bloomberg New Energy Finance and Fitch Ratings have both projected a dramatically different price outlook.

And meanwhile, too high an increase would play against OPEC’s interests: “They want to see prices in the $50 to $60 range, not any higher because that would kick in too much North American competition,” said Tim Pickering of Calgary-based Auspice Capital Advisors.



in Energy / Carbon Pricing & Economics

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