Opec mops up the oil glut

The members of Opec, the oil exporters’ cartel, agreed to “extend-and-maybe-amend” their output deal.


Brent crude prices have risen to a two-year high, but expect a slip back
(Image credit: 2013 Getty Images)

At last week's meeting the members of Opec, the oil exporters' cartel, agreed to "extend-and-maybe-amend" their output deal, says Liam Denning on Bloomberg Gadfly. For the past two years Opec, along with Russia, has lowered production by 1.8 million barrels per day, around 2% of global supply. This arrangement, originally due to expire next March, has been extended to the end of 2018, although it will be reassessed in June.

The idea is to reduce a glut that led to a slump in oil prices in 2014. Opec and Russia jointly account for 60% of global production. The price of Brent crude, the benchmark oil future, rose to around $64 a barrel. Prices have risen by 20% to a two-year high in2017.

The rise reflects the fact that Opec has managed to mop up some of the massive glut. The International Energy Agency says oil inventories in the developed world slipped below three billion barrels for the first time in two years. Demand estimates have been revised upwards as theglobal economy has gained momentum.

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The trouble is, says Denning, that it has become much harder for Opec to manipulate prices in the past decade. Ten years ago it "could at least count on a lag of several years between adjusting the controls and supply and demand reacting". These days cutting output is a much blunter instrument. Demand still takes time to be choked off by high prices, but it is under structural downward pressure from the growing interest in electricvehicles.

And on the supply side, US shale drillers, new players in the industry, "can react within six to 12 months, especially given a huge stockpile of drilled-but-completed wells". Indeed, "American producers already seem to be taking advantage" of higher prices, say Georgi Kantchev and Summer Said in The Wall Street Journal. After sliding for much of the past three months, the number of oil-drilling rigs in operationjumped by nine to 747 last week.

Meanwhile, it's not clear that the deal will stick. In the past Opec countries have been notoriously prone to cheating on their production quotas. So far compliance with the output-cut agreement has been relatively strong. But divisions could soon emerge between states that need a higher oil price to balance their budgets, and will therefore want to keep cutting output, and those who worry about choking off demand or stimulating shale too much. Russia is among the latter, which is why the deal will be revisited in June. The upshot? Don't expect prices to rise much above $70 before they fall back again.

Asia gets back to normal

Rock-bottom interest rates in emerging Asia have been a key symptom of the lacklustre global recovery in recent years. But now things are finally starting to get back to normal. South Korea's central bank raised its benchmark interest-rate by 0.25% last week, its first hike since 2011 and the region's first since 2014. Korean rates had been at a record low of 1.25% since June 2016. Growth accelerated to 3.6% year-on-year in the third quarter of 2017, and inflation is nearing the central bank's 2% target.

Korea is one of Asia's most open economies, and exports have been largely responsible for the economy's momentum. The volume of trade in goods and services is expected to expand by 4.2% in 2017, up from 2.4% last year, say Enda Curran and Andrew Mayeda on Bloomberg. It would be the first time in three years that trade has grown faster than world output in three years.

Trade has been slow to rebound, but surveys suggest that it should keep growing. Provided the Trump administration doesn't ruin the party by imposing protectionist measures on America's major trading partners, there should soon be more rate hikes in emerging Asia.

Andrew Van Sickle

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.