OPEC Output Cut

OPEC ministers met this month and agreed an output cut of 700,000 barrels per day. This would remove around half of the total glut currently affecting global markets. However, OPEC won’t release details until next month. They have said though that cuts will not be evenly spread and Iran will be allowed to increase production. Crude markets went up by 6% following the announcement however many are sceptical.

We have been here before back in March only for the deal to be scuppered at the 12th hour by Saudi Arabia’s hot new Prince making further demands on Iran. Will the Russians join in cuts or do what they did in 2010 and boost production?

However, many OPEC members like Saudi are bleeding funds, others like Venezuela are dying and Saudi’s strategy has not worked. Shale producers have proved far more resilient than they were ever thought to be and have continued to cut costs. Even high cost deep sea projects have cut costs and the rise of renewable energy and the electric car seem unstoppable.

OPEC has failed to copy its success from the 70’s and 80’s and it is time for the institution to be more pragmatic. Today and for at least the next 20 years the world will still need substantial supplies of crude. It’s probably better for the institution to allow prices to rise today and spend the proceeds to better restructure their economies away from oil.

This month’s announcement may be the beginning of this process but even if it is not it will have to start in the next 12 months. We expect oil to be trading in the $50-60 range by the end of this year and move back to the $80 a barrel range by the end of 2017. One thing that this current crisis has done is to severely dent new oil production so it may well be the case that by the 2020’s oil is once again well above $100 a barrel.