Opec strikes a deal – but oil prices are “going nowhere fast”

Opec, the oil exporters’ cartel, has finally managed to strike a deal aimed at assuaging a supply glut that has weighed on oil prices for more than two years. The group’s decision to cut production from January by 1.2 million barrels per day saw oil prices on the world market jump by almost 15%. However, the cut was not enough to convince the market of the long-term effectiveness of the agreement.

This latest deal will come to symbolise “the passing of one of the world’s most powerful cartels”, says Nick Butler, chair of the King’s Policy Institute, in the Financial Times. The agreement represents the “recognition of their own impotence by a group of countries that once held unchallenged power”.

This is not an agreement capable of pushing prices above the targeted $60 or $70, partly because it is improbable that countries like Iran and Russia will deliver what was agreed and reduce production. It’s also unlikely that oil stocks will fall, considering the resilience of US shale producers and the surge of production coming from new fields in countries outside Opec, such as Brazil and Kazakhstan, he adds. “For all these reasons, the current deal is inadequate and will fail.” 

But analysts at Barclays were more optimistic about compliance with the deal, largely because many of the usual suspects for oil’s equivalent of infidelity are facing security and economic challenges, according to Barron’s. “Russia needs higher prices to stem the widening budget deficit,” point out Barclays’ commodities analysts. Moreover, if Moscow were to backtrack on its commitment, it stands to poison further its bilateral relationships with Iran and Saudi Arabia, therefore putting its Middle East and North African policy objectives at risk.

Enforcement of Opec’s deal is the key to preventing oil prices from falling again, agrees Phillip Inman, economics correspondent at The Guardian. But even if the deal sticks, it is likely to put a floor under the price only, not send it back into the stratosphere. Moreover, weak demand due to the state of the global economy will remain a significant barrier to high prices. “The interaction of supply and demand, most of it outside Opec’s control, means that for the next couple of years prices are probably going nowhere fast.”