Opec makes a deal – but will it hold?

Oil producers have reached their first global supply pact since 2001 – and the largest on record. But Opec and Russia are notorious cheats when it comes to implementing agreed quotas.

Andrew Van Sickle
By
published
in Features

No wonder oil has shot up to an 18-month high around $57 a barrel. Oil producers have reached their first global supply pact since 2001 and the largest on record. Opec, the oil producers' cartel, recently agreed to reduce record output in order to cut the global glut and shore up prices. It has now managed to rope in non-Opec exporters too, including Russia, Oman, Mexico and Kazakhstan. The deal covers 60% of the oil market, and implies that almost 2% of worldwide production would disappear enough to ensure that the market could swing from surplus to deficit by mid-2017, say analysts at AllianceBernstein.

All of which would sound bullish if it weren't for that Opec and Russia are both notorious cheats when it comes to implementing agreed quotas. "The higher the barrel price, the greater the temptation to break allocated quotas" in order to maximise income, as BMI Research pointed out in The Wall Street Journal. According to Goldman Sachs figures, in 17 production cuts since 1982, Opec members have only trimmed output by an average of 60% of their commitments. Russia, meanwhile, reneged on its last promise to cut in 2001. The uptick in the oil price also implies higher output from US shale producers, which seems likely to temper the rally next year. US output has fallen by 10% as some shale drillers succumbed to the Opec-induced glut, notes David Sheppard in the FT. But the sector has become far more efficient, and the number of US drilling rigs has been on the rise in the past few months, suggesting that drillers are keen to cash in on higher prices.

A new factor in the outlook, however, is higher demand growth now the US economy is expected to step up a gear under Trump, while China's government has been juicing growth again. The upshot? Goldman Sachs reckons that if just over half the targeted cuts are actually implemented, oil prices could average more than $55 a barrel in the first half of 2017.

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Andrew Van Sickle
Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

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