On Thursday, November 30, OPEC held its regular meeting in Vienna. As largely expected, the Organization of the Petroleum Exporting Countries (OPEC) and several non-OPEC partners including Russia agreed to extend the cut in oil production with another nine months, which will take the deal to December 2018.

This is the second time the group is taking such a decision. OPEC first agreed to tighten crude oil supply from 2017 following a steady downturn in oil prices. In May 2017, OPEC was joined by non-OPEC partners including Russia, the most important non-OPEC partner and the largest oil producer in the world.

This week decision would mean that OPEC and some key non-OPEC oil producers will have to continue to respect their quotas and keep oil supply in check. The deal is designed to remove 1.8 million bpd from the market.

The implementation of the agreement is one of the challenges as previously shown. Some OPEC members, like Algeria, Venezuela and the UAE did not fully implement the production cuts for several months.

Despite the fact that OPEC and non-OPEC oil producers need and would prefer higher prices, they all have different economic and political challenges which makes it difficult to swallow this production restriction pill. Oil producers need higher oil prices to be able to attract investments in new drills and technology development. Saudi Arabia who will be listing ARAMCO on the stock market next year will also benefit from a more stable price.

But in Russia, for example, major oil companies like Rosneft, Lukoil and Gazprom Neft wanted to increase production and market share in 2018. It took a lot of persuasion by the Russian oil minister Alexander Novak and president Putin’s personal support for the deal to become possible. These businesses will now have to comply with the oil cut decision at the expense of short term profits.

Despite their commitment to maintain certain price levels, oil producers that signed the deal are concerned about keeping their markets and market shares. They have been challenged by shale producers from the US who, after a short hiccup during the extremely low oil prices, are now back as competitors for markets and investments. It is said that non-conventional oil production can compete if oil prices are above 50 US dollars per barrel and therefore oil cut deal in effect supports indirectly non-conventional drillers.  

Since the supply volumes have been contained in 2017, crude oil prices increased from around 40 dollars per barrel to over 60 dollars per barrel. The latest decision, however, had a little impact on the prices as the market has been pretty much anticipating it and therefore had priced it in already.

Saudi energy minister Khalid al-Falih said that he is hoping for stable prices and market in 2018. He acknowledged that this will depend on supply from other players and in particular from the US shale producers. If 2018 unfolds as planned, al-Falih expects inventories to decline to the desired targets in the second half of 2018. However, if the US increases the input over the next few months, then price could very well collapse by the end of 2018.

Although the decision to keep the deal for another nine months was largely expected, it took a lot of compromising to be finally agreed and it remains to be seen how successfully it will be implemented and if it will deliver the expected results.  

OPEC would examine progress and adjust the agreement based on market conditions at its next regular meeting in June.