OPEC agreement solidifies — with a twist

When OPEC surprised the world by announcing that it had forged an agreement among its members to cut 1.2 million bbls. a day of production, the real shock was that the group claimed the support of Russia and other non-OPEC countries to also cut their output.

The total cut of 1.8 million bbls. of daily output would essentially eliminate the world’s overproduction. With the arrival of winter demand, we can look forward to shrinking global oil inventories. However, the agreement doesn’t begin until Jan. 1, which gives producers time to ship additional oil before having to cut and bank more cash from the $53-bbl. oil price (WTI as of Dec. 13). Because of this implementation delay, inventories will build a little more before they start falling.

Skeptics were scornful of the agreement almost as soon as it was announced and made all the usual arguments — OPEC countries always cheat, it’s just a matter of time before the extra oil is found by the tanker tracking agencies and global oil prices will start falling again. Could this time be different?

The back story of how the deal came together amidst the almost universal view that it would fail centered on a reported 2 a.m. phone call between the Saudi Energy Minister Khalid Al-Falih and his counterpart in Russia, Alexander Novak. During the call, Novak said that not only would Russia support an oil production freeze, but that it was also willing to cut production if that was what was needed for a grand deal to be put in place. Score one for the Saudis!

Another story about the deal has also surfaced. Supposedly, Iran, did not attend the meeting, caught wind of the turmoil within OPEC over the need to get non-OPEC support if any deal could be done. So, according to media reports, the leader of Iran phoned the Kremlin two days before the meeting date telling them that they needed to overwhelmingly support the deal. Voila, we have Russian energy officials aggressively supporting their Saudi counterparts to get an agreement put in place. Score one for Iran!

While we may not know the truth behind these stories, it may be that we are witnessing another aspect of the struggle between Saudi Arabia (leading the Sunni sect in the region) and Iran (representing the Shia sect) over who will have the greater influence over Middle East geopolitics. It’s another example of why the ups and downs of the international oil business prove so fascinating to observers, let alone participants.

Grab your popcorn and scorecard and we’ll see what happens to the agreement in a month or so — perhaps by then we’ll know who really scored!

About the author

G. Allen Brooks

G. Allen Brooks is a 40-year veteran of the energy and investment industries, serving as an energy securities analyst, an oilfield service company manager, a consultant to energy company managements and a board member of several oilfield service companies. He is the author of the highly regarded energy newsletter “Musings From the Oil Patch” that interprets trends within all sectors of the energy business.

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