Opec mops up the oil glut

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


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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

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.

Advertisement - Article continues below

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.




Commodities look cheap

Gold may be on a bull run, but industrial commodities, including copper, zinc and aluminium, remain cheap.
17 Jan 2020
Global Economy

What escalating tension between Iran and the US means for oil prices

The tension between the US and Iran is unlikely to mean all-out war in the Middle East. But markets may be getting a little too complacent about its e…
6 Jan 2020

Rising output will keep a lid on the oil price

Oil exporters’ cartel Opec gave further encouragement to the bulls this month after agreeing to new production curbs.
20 Dec 2019

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Most Popular


House prices and Covid-19

The housing market is in deep freeze – what happens when it thaws out?
5 Apr 2020

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Global Economy

The MoneyWeek Podcast – Russell Napier: how much debt is too much?

Merryn talks to financial strategist and author Russell Napier about the huge levels of debt embedded in the global economy, the governmental response…
3 Apr 2020