All talk of $30 per barrel of oil has subsided for the foreseeable future. On Monday, the world’s leading oil producer Saudi Arabia signalled it might cut production more than the level it committed to at the OPEC deal signed on November 30, depending on market conditions.
This announcement was made soon after Russia, and several non-other OPEC countries pledged to curb output next year. The first such agreement between the Organization of Petroleum Exporting Countries (OPEC) and non-members since 2001 on Saturday represents a definite attempt by the Saudis at taking back control of the global oil market, which has been subdued due to persistent oversupply and massive inventories.
Analysts expect the move to provide relief to oil producing nations, which have been seeing stiff competition from the United States-produced shale oil. Before the first November 30 deal, OPEC countries had been producing at record levels, as members sought to firm their grip on the market, following the entry of US-produced shale oil. However, the oversupply resulted in a massive fall in oil prices from $110 per barrel to $40 barrel this year.
In response to the deal on Monday, oil prices shot up four percent. Brent crude futures – the international benchmark for oil prices – rose to $57.89 (approximately Rs 3,911.92) per barrel. Reports indicate that the Saudis are trying to push oil above $60 a barrel in an attempt to balance its books. On Saturday, non-OPEC members agreed to reduce their production by 558,000 barrels per day (bpd). Russia will be the biggest contributor to such cuts, gradually reducing production by 300,000 bpd.
To reiterate, the deal with non-members comes just days after OPEC struck its first deal to cut production output since 2008. Under the agreement signed on November 30, OPEC decided to reduce production by 1.2 million bpd. The International Energy Agency argues that if the OPEC sticks to the deal and other non-OPEC economies hold the line, the global market could “move from surplus to deficit very quickly in 2017”. This shortfall would lead prices to jump once again.
Will the deal stick? Or will the US shale industry formulate an easy path to greater market share riding on OPEC’s proposed discipline? It’s imperative to note that the deal between OPEC and non-OPEC accounts for 60 percent of the world’s oil, but excludes major producers like Brazil, Canada, China and the US. How will these nations respond to recent developments? What are the implications of these deals for India? As India imports most of its oil from OPEC countries, these deals will have an impact on the country’s exchequer.
In response to these recent developments, Minister of State for Petroleum and Natural Gas Dharmendra Pradhan mooted the idea of a large buyers’ forum to negotiate better trade deals and counter-balance OPEC’s influence. This approach is problematic on two fronts. It is unfeasible because at this juncture countries often cut individual deals with seller-nations. Moreover, considering India’s growing ties with the United States, major oil-producing nations may be hesitant to cut favourable deals.