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Opec’s unclear resolve

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Opec’s unclear resolve

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By Ed Crooks, September 30, 2016

After two years of inaction as a strategy, Opec this week decided to do… something. Exactly what it will end up doing has yet to be determined.

When Opec ministers met at a beach resort in Algiers, they agreed a statement setting a target for their oil production that is roughly 250,000-750,000 barrels per day lower than the cartel’s current output. The big missing piece from the deal, though, was how the cartel’s members would share out the cuts needed to reach that target. A “high-level committee” of representatives from member states, supported by the Opec secretariat, will work on recommendations for individual countries’ cuts, which could be confirmed at the next ministerial meeting, in Vienna on November 30.

The plan faces an array of hurdles before it can deliver any real reduction in crude supply. Already Iraq has been challenging the Opec production estimates that will be used to help calculate the allocation of cuts, and warning that unless the figures were recalculated, the country would say in November “we cannot accept this”.

Still, the shift in Opec’s stance is significant. Javier Blas and Grant Smith at Bloomberg identified one key factor behind the change: Saudi Arabia’s “tattered finances”. The kingdom issued royal decrees on Monday cutting bonuses and benefits for government workers.

In any anti-competitive market strategy, the biggest problem is free riders benefiting from higher prices without taking on any of the burden of reducing output. The biggest winners from an Opec cut will be non-Opec producers, with US shale companies best placed to respond quickly to improving conditions. Oil and Gas 360 said the message from Opec to US producers was “drill baby drill”.

Deepwater Horizon’, the film of the 2010 disaster in the Gulf of Mexico, is released in Britain and the US today. The FT’s reviewer gave it four stars, but BP was much less positive. For a big-budget film, it actually sticks remarkably closely to the facts, but where it departs from the truth, it is always to BP’s detriment.

Quote of the week

“The Conference took into account current market conditions and immediate prospects and concluded that it is not advisable to ignore the potential risk that the present stock overhang may continue to weigh negatively well into the future, with a worsening impact on producers, consumers and the industry” – Statement from the Opec ministerial meeting in Algiers.

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