Hope for the Oil Industry

Retrieved from: http://fpif.org/the_great_oil_swindle/

An interesting development came to light last week; or well, I hope you share the opinion that it is interesting. As most of you know, the oil price has been a continuous issue over the last year and half because of the market surplus. If you are not aware, let me just give you a quick recap of whats been going on in the oil industry. Basically, more oil is being produced than the market can handle, and as you may know from basic economics, the excess supply causes the price to drop. The main reason for the overproduction is that none of the oil producing countries are willing to reduce their production in fear of losing market share [see The Tale of the Oil Price for more]. Currently oil is being traded at about $30 for WTI crude oil and $34 for Brent (19-02-2016), which is about half of when I last wrote about the state of the oil market back in June of 2015.

So what is this interesting happening you ask? Well, Saudi Arabia, the world’s oil powerhouse has reached an agreement with Russia to freeze oil output, if they are joined by other large oil producing countries. The agreement was reached in Doha in a meeting behind closed-doors with other Organization of the Petroleum Exporting Countries (OPEC) members Qatar and Venezuela (OPEC also includes Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria and the United Arab Emirates). At first glance this is a positive development but the issue is that another large oil producing country would have to agree as well. Iraq has since announced that they are willing to freeze its oil production at January levels, under the condition that big producers both inside and outside of OPEC follow suit. Iran has also expressed its interest in stabilizing and consequently increasing oil prices through the means of a production cap. Iran’s oil minister Bijan Zanganeh was quoted saying “We look forward to the beginning of cooperation between OPEC and non-OPEC countries…”. This in fact is quite surprising because many experts believed that Iran would be negligent to such an agreement since they would want to expand their production, rather than capping, considering the newly accessible markets for them.

It is important to keep in mind that freezing the output in this agreement means that the production output will be capped at the output levels of January 11th, 2016. These, by the way, are almost record high production levels so really this agreement would only ensure that the excess is not increased at an even faster rate. As of yet nothing is official yet so it could still end up not happening. Nevertheless, it is very promising that OPEC and non-OPEC countries are talking and agreeing on the first steps to stabilizing the industry. Time will tell on to what extent this cooperation may continue, because of course the concerns of losing market share when it comes to reducing output are still very present.

Sources:

http://www.wsj.com/articles/oil-output-freeze-talks-ongoing-says-iraq-1455792039

http://www.ft.com/intl/cms/s/0/da44fb1c-d485-11e5-8887-98e7feb46f27.html#axzz40Lj0QW1T

http://www.bbc.com/news/business-35593628

http://www.wsj.com/articles/oil-output-freeze-talks-ongoing-says-iraq-1455792039

http://www.oil-price.net/