Dun & Bradstreet’s Perspective on the OPEC Deal

Will the OPEC Deal Last?

The OPEC deal, thrashed out after months of negotiations, took sceptics by surprise with the depth of the agreed-upon cuts. The deal is the first time since the global financial crisis that OPEC has limited production of its members; on that occasion the deal only lasted for two months. Nevertheless, although markets reacted positively to the announcement, the initial price rise was rather muted with Brent Spot only finishing the trading day in London some 6.7% up on the previous day at USD49.62/b.

Although the price continued to rise in early trading to over USD52.5/b, the reaction was less euphoric than OPEC members would have hoped for, having touched this price in mid-October, when the deal was still only a rumour. Furthermore, the price remains significantly below the USD71/b mark of early December 2014.

Arguably, it appears that markets are not convinced that the deal will have anything other than a short term positive impact on the oil price. Dun & Bradstreet is sceptical about the ability of the oil producers to be able to deliver on the agreement, perhaps even from the outset of the agreement date of 1 January 2017.

What are the Highlights of the OPEC Deal?

• Deal to start on 1 January 2017 and last for six months
• Can be extended for a further six months
• OPEC production to be cut back by 1.2m b/d to 32.5m/d
• Cuts range from 4.4-4.7% against October 2016 output levels
• Libya and Nigeria exempted
• Iran allowed to increase its output to 3.8m b/d
• Iraq set formal limit for first time since 1990s
• Non-OPEC countries to cut output by 600,000 b/d, with Russia absorbing the majority at 300,000 b/d

Dun & Bradstreet’s Perspective on the OPEC Deal:

• Dun & Bradstreet thinks that oil prices will rise, but that any price rise will be temporary, as agreement is unlikely to be adhered to, even in the short term.
• If the price rise does last well into 2017, winners will include the US oil and gas shale sector, green energy producers and oil-producing countries and companies. Central bankers will also benefit from the rise in prices, which will push inflation towards target.
• Losers will be the agricultural sector, transportation sector, energy-intensive industry, oil-importing countries and consumers.

The OPEC deal may not push prices up to the USD60/b level for the following reasons:

1. Output levels are difficult to monitor, and cheating on previous agreements has been endemic within OPEC.
2. The deal is reliant on non-OPEC countries, in particular Russia, to adhere to their side of the agreement.
3. Aside from Russia, it is not clear which non-OPEC countries will contribute to the deal: possibly Mexico, Brazil, Azerbaijan, Kazakhstan and Oman – but all have their own economic and political problems.
4. The political and economic situations in Iran, Iraq and Russia make it more likely that these countries will not adhere to the agreement.
5. Libya and Nigeria are both producing at well-below capacity, and, if the security situation stabilises, could boost production significantly
6. OPEC oil production has increased by 4.4% from December 2015 to October 2016 (the reference point for the cuts); thus mitigating the impact of the promised cuts.
7. Even taking into account the deal, supply is still high (97.8m b/d in October according to the IEA) in relation to demand (97.1m b/d) in Q3 2016 according to IEA data).
8. Stocks remain high around the world, ensuring downward pressure on prices.
9. Any short-term price rise will boost US shale oil production, thereby boosting supply and putting downward pressure on prices.

As a result, Dun & Bradstreet remains in the sceptical camp about the ability of the oil-producing countries to have anything than a positive short-term marginal impact on oil prices.