A recent announcement made by Saudi Arabia and Russia to freeze the output of oil production to January levels marks a significant turning point for the commodity however the agreement by the top world producers comes attached with conditions that other members co-operate with the scale back. Saudi has rebuffed a number of proposals made by Venezuela and other members of OPEC for cuts in production since as early as last year but found the opportunity to bring Russia into the fold all to crucial to reignite its ambitions to continue dominating the world oil supply through OPEC.
Russia's deal with China to supply oil to the ever growing economy dealt a bitter blow for the oil body who had been hopeful of securing a lucrative agreement that would grant it access to gigantic demand with plentiful quantities needed to drive forward the progression of a new economy buzzing with millions of potential consumers.
Although both parties sit on the opposite spectrum of the support lines involving the Syrian civil war, the need to replenish government coffers has taken an unprecedented priority as the funding needed to continue that support evaporating at an alarming rate and with much at stake in that region it doesn't seem likely that anyone wants to walk away not having secured a good deal. A clear case of keeping your friends close but your enemies closer.
But the deal proves to be mutually beneficial to both nations as Russia finds itself in a spot of trouble following sanctions being imposed on it due to the annexation of Crimea which has crippled the nation's growth rate pressing President Vladimir Putin to tone down his provocative talk. The former communist state understands the importance of a steady growing economy if it is to compete in trade terms with the likes of its neighbours, the EU.
A problematic issue that will present itself is that of Iran who had its own sanctions lifted and now in the processing of catching up after years lost. The oil rich nation has said explicitly that it will not cut back production and plans on expanding output to around 4 million barrels per day. The nation was responsible for OPEC effectively scrapping output targets at its recent meeting in December 2015 where no solid decision could be made.
If Iran were to expand production by 1 million barrels it would simply negate any positive impact made by smaller producers and deem the program useless. However it could also damage the reputational image of the organisation by allowing larger output nations to not co-operate but making the smaller ones comply. It would open up the door for "cheating" to occur in the future as smaller players wouldn't find the need to cooperate in their direct interest if OPEC was willing to overlook discretionary situations whilst ignoring the cries of others.
Case in point was when Venezuela and Nigeria both pleaded with the oil body to bring forward the scheduled meeting last year as their respective economies were on the brink of collapse. Their calls were ignored yet as the momentum gains ground with the present situation we see that the urgency to put a plan of action in place is not based on eliminating the ill effects of those economies but rather that of Russia and Saudi Arabia. Self centred decision making has never won any friendships nor will it defend the actions of the organisation.
More still needs to be done to curb supply and a freeze in production won't aid that if demand carries on taping off but it does signal a shift in trend away from producing and focusing on reducing production steadily so to allow the price to return to a point where the industry may begin to profit once again. I don't envision seeing a dramatic surge in price this year with a possible a modest increase happening depending on the depth of reductions made. We've hit a bump in the road with Iran and nothing stops a further bump to occur.
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