Oil prices spike post deal

Confounding sceptics, the Organisation of the Petroleum Exporting Countries (OPEC) on Wednesday struck its first deal to cut production output since 2008. To the uninitiated, OPEC produces approximately 33.6 million barrels per day (bpd) or one-third of global oil. Under the agreement, OPEC has decided to reduce production by 1.2 million bpd. Reports indicate that the agreement will take effect on January 1, 2017, before which OPEC will consult non-members to decide when they will begin reducing their output. Talks with non-OPEC producers will be held on December 9. Saudi Arabia has decided to take the biggest cut. It will reduce production by 0.5 million barrels per day to 10.6 million bpd. Fellow member nations, including Kuwait, United Arab Emirates and Qatar will slash production by 0.3 million bpd. Special provisions have been made for the likes of Iran and Iraq. Iran agreed to limit its output to just under 3.8 million bpd, almost the same amount in 2005 before the crippling US-backed sanctions took hold. Experts contend that Tehran has worked out a good deal. Iranian President Hassan Rouhani has long asserted that his country needs to recover market share that it had lost under economic sanction before the Iran-US nuclear deal. Iraq has also agreed to cut production by just 0.2 million bpd, considering its need for funds to fight the Islamic State. Non-OPEC member, Russia, meanwhile, also joined the deal and said it would cut production by 0.3 million bpd. In response to the deal, the price of crude oil jumped by approximately 8 percent to $50.24 per barrel. 

Before this deal, OPEC nations 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. Experts contend that oil prices are well below the budget requirement of most OPEC nations. Earlier attempts to cut production failed because of disagreements between Iran and Saudi Arabia. In the past, Riyadh had said that it would reduce output to ease a global glut only if other member nations committed to the same. Although both countries heavily depend on oil, Iran has suffered a lot less from the drastic fall in prices since it was denied access to the global market by Western-backed sanctions. But rising unemployment and slow economic recovery have forced Iran to seek maximisation of oil revenues. Riyadh’s decision to change tack comes amidst reports of a stagnating domestic economy. The Gulf giant faces a second year of significant budget deficits after a record deficit of $98 billion last year. Saudi Arabia, backed by the US and other Western powers, is fighting massive proxy wars against Iran and Russia, in Syria and Yemen. Despite these massive political hurdles, all sides have seemingly found a compromise. Economic compulsions usually find a way to trump ideological and political differences. There was, however, one casualty from this deal. Indonesia, the cartel's only Asian member, said it would suspend its membership as it wasn't willing to honour the deal. Experts contend that Indonesia’s decision to pull out makes little difference to the current scenario since it is a net importer of oil. There are reports that despite the surge in prices on Wednesday, oil prices are still merely at levels last seen in September and October. 

In a note to its clients, leading multinational finance company, Goldman Sachs raised a point that is now on everybody’s mind. "With the deal agreed to in principle and country level quotas established, the focus will now shift to implementation," it said. How this cut in oil production will play out will heavily depend on the course taken by economies outside the OPEC. The consensus among market analysts is that if the deal holds and other non-OPEC economies follow suit, the world may not necessarily go back to a world of $100 per barrel of oil, but it will definitely not touch the low prices recently witnessed. 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 hold? Or will the US shale industry formulate an easy path to greater market share riding on OPEC’s proposed production cuts? What are the implications of the OPEC deal for India? As the fourth largest importer of crude oil, India imports 85 percent of total oil and 95 percent of natural gas from OPEC nations. The drop in India's inflation levels has been largely down to the huge slump in crude oil prices. As a major importer, India has been a key beneficiary. At present, India incurs a massive Rs. 4.5 lakh crore on crude imports. Although experts contend that oil prices will not return to the highs of $100 per barrel, the Centre cannot function under the presumption that prices will remain low in the long-term.