The 14-nation energy cartel, the Organisation of Petroleum Exporting Countries (OPEC), meets later this month (June) celebrating a unique deal that has supported the oil price and given the industry the confidence to invest.
OPEC’s December 2016 agreement with ten non-members to limit oil production and co-operate in other ways has ended what had been a savage downturn in the price of crude on world markets.
The Declaration of Co-operation was designed, said OPEC, to “accelerate the stabilisation of the global oil market through voluntary production adjustments, which amounted to approximately 1.8 million barrels a day”.
World oil production is about 99 million barrels a day, thus the deal cut 1.82% out of crude output. While that may not sound a lot, the balance between supply and demand is very close, meaning even quite small changes to production can have a significant effect on the price.
Deal “rescued" the oil industry
OPEC members contributed 1.4 million barrels of cuts, while the non-OPEC countries reduced output by 400,000 barrels a day.
The arrangement was originally intended to run from December 2016 to May 2017, but was extended, first, from July 2017 to March 2018 and then to cover the whole of 2018.
With the mid-point of the year drawing closer, the big question at OPEC’s conference in Vienna on 22 June is what will happen in 2019 and beyond. How will the OPEC meeting 2018 decide to go forward?
In what amounts to the OPEC meeting latest news, on 30 May, Mohammad Sanusi Barkindo, Secretary General of OPEC, said the Declaration of Co-operation “rescued the oil industry from its worst downturn and has fundamentally changed the energy landscape”.
He added that “it has reintroduced a long-absent element of stability to the market – there is now far more optimism and confidence in our industry, compared to two years ago”.
Mr Barkindo suggested that the machinery supporting the Declaration of Co-operation could become permanent. “The next critical phase in the whole process is to sustain these accomplishments of market re-balancing, a gradual recovery in investments and the return of confidence in the industry,” he said.
“How will we achieve this? Going forward, through a broader and more institutionalised framework of co-operation based on…core principles of equity, fairness and transparency, we will look into developing metrics and designing mechanisms to help govern against future shocks and extreme volatility in the market.”
A number of factors have buffeted the oil price in recent years. One was a fear of economic slowdown in China, an increasingly-important oil consumer. Another related to the flourishing shale oil industry in the United States, previously thought vulnerable to a price drop but more recently, thanks to technological developments, more resilient to a reduction in revenues.