Macroscope | What Bill Gross said about the economy explains why the OPEC output agreement won’t work
‘From OPEC’s perspective the lower output deal should shift the pricing pendulum away from oil consumers and back towards oil producers’
The Organisation of the Petroleum Exporting Countries (OPEC) has agreed a cut in its combined daily output for the first time in eight years but question marks remain over the implementation of the November 30 deal, let alone the chances for a higher oil price that can then be sustained.
On the supply side, internal differences within the oil cartel may re-emerge to confound the agreement. Also, while some non-OPEC countries may co-operate by cutting production, others may ramp it up to take advantage of a higher crude price.
Meanwhile, on the demand side of the equation there is the issue of whether the world economy, where productivity has hardly been soaring even with a lower crude price and where what growth there has been has largely been financed by taking on higher and higher levels of debt, can actually afford more expensive oil.
OPEC can partly control supply but not demand
As regards the deal itself, OPEC “decided to reduce its production by around 1.2 mb/d [million barrels per day] to bring its ceiling to 32.5 mb/d, effective 1st of January 2017.”
However it should also be pointed out that this figure excluded Indonesia who was suspended from the cartel due to Jakarta’s inability to agree the size of its own quota cut. Indonesia ordinarily produces some 750,000 b/d and will surely continue to do so.
Then there is the possibility that Saudi Arabia, who is set to cut production by 486,000 b/d, may well find the exclusion of Iran, its regional rival, from the output cut, a bitter pill to swallow, given their geopolitical differences.
Specifically, having lost some market share in China to Iraq, Iran and Russia over the last few years, Riyadh might yet be uncomfortable with the idea that output cuts, largely borne by Saudi Arabia, end up lifting the oil price to the benefit of Baghdad, Tehran and Moscow.
