OPEC agrees to oil production cuts but how far it moves beyond words

Ole Slot Hansen

ETP Division Director, Saxo Bank

Saudi Arabia canceled its strategy to gain market share, launched in November 2014 after OPEC countries decided to cut production by about 700 thousand barrels/day on September 28 at the meeting in Algeria (the future allocation of this amount will become clear at the meeting on November 30, 2016). This is the first reduction in eight years, undertaken to support the balancing process, which has practically stopped, because some OPEC countries and Russia kept increasing the production volumes. The solution should stabilize the market, but limit its growing potential until first signs of decline in excess supply.

Several questions stayed without answer:

• Who will cut the production if several countries including Nigeria, Libya and Iran, presumably get preferences?
• Who will compensate the potential increase in production in Nigeria and Libya to the same extent?
• Will independent assessment of production volume be used or countries will provide their own, usually inflated, statistics?
• When the decision will come into force? If these details are not agreed until November 30, we will hardly feel the effects earlier than next January. Some of the questions are addressed to Saudi Arabia, which, apparently, took on the lion’s share of production cuts. But fewer barrels at a higher price is probably a bargain for the Kingdom because at this time of year the production volumes are traditionally lower.

Last week, before volatility, hedge funds increased the gross short position by 50%. Further growth from current levels will depend, to some extent, on how many more positions need to be reduced. Crude oil Brent is still below the peak values that were reached when the Minister of energy of Saudi Arabia in August for the first time mentioned the possibility of freezing production levels