What is OPEC’s Next Move at the Poker Table?

pipeline Roger Asbury/Adobe Stock

Spend Matters welcomes this guest post from Diarmuid O’Donoghue, manager, consulting, at GEP.

Every Christmas, it is a tradition in my family to come together and play poker for fun. Without fail, one of my uncles is renowned for trying to bluff the rest of us with a poor set of cards. Despite us knowing his reputation, he continues to do so every year (and loses, might I add).

In late September, OPEC members reached a preliminary agreement to limit the group’s daily production to between 32.5 million and 33 million barrels a day. They have said they’ll complete the agreement, including setting individual member output quotas, at their next official meeting in Vienna in late November.

Just like my uncle at Christmas, this was a characteristic move for them. For decades, this is how the oil business has worked. Producers carefully control production to try and match supply to demand.

However, since the announcement, the market has been skeptical about the successful implementation of this production cap, as OPEC countries have a track record of breaching such agreements. With oil prices down this week, it seems those at the table are unsure if OPEC is holding a “full house” in their hands, or if they are going to have to fold their cards.

There have been several signs that OPEC’s chips are running low. The latest question surrounds Iraq’s refusal to accept production data from secondary sources as the basis to calculate cuts. The country also claims that because of their expensive campaign against Islamic State, it should receive some kind of exemption, like what Nigeria and Libya may receive.

Another wild card that could derail the deal is Russia, which hasn't offered a clear commitment to join OPEC’s efforts to curb production. Russia’s oil production reached a post-Soviet high in October of 11.2 million barrels a day.

On the other side, one factor that could make it easier for members is that OPEC's already pumping full tilt at levels that are hard to maintain. Saudi Arabia, the group’s largest producer and de facto leader, has been pumping at record levels in recent months and was expected to slow down output in the fall and winter anyway. OPEC also hasn’t approved a cut since after the financial crisis in 2008, which flattened oil demand and lowered oil prices significantly.

Analysts predict that if OPEC members produce oil within the agreed limits, crude oil could rebound by $5 to $7 per barrel. However, an increase in oil prices beyond this limit could reinstate U.S. shale producers to grow their production at a faster rate, as it would become economically viable for them to do so. This could dilute the impact of OPEC’s move to cut output to improve oil prices.

The group kicked off its September meeting with acknowledgements that it needs to rebuild credibility in the oil market after years of vague promises. Thus, the terms of the agreement, and the intent of the OPEC countries to abide by these terms, will play a crucial role in the recovery in crude oil prices over the next few quarters.

It remains to be seen if OPEC will remain true to its word, and only its memebers know the cards they hold and their next move at the table. However, the next move for my uncle at Christmas is not up for question. He never disappoints!

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