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Is OPEC cut a worth?

Feb 24, 2017(12:20)
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In the recent times oil markets were in a jittery. Till November 30, 2016, until the production cut deal was signed by 13 nation OPEC and 11-Non OPEC nation, with Saudi Arabia and Russia both agreeing to cut production in order to stabilize the oil prices. They agreed to curtail output post-deal to 32.5 million barrels. Big oil giants in OPEC such as Saudi until now is keeping its promise to cut their output. But since the market share in any market is a win / lose situation for the participants in it, Saudi cutting its output would be eyed by its competitors as an opportunity to increase their market share and also new entrants entering into the supplying of crude oil would affect the market dynamics.

In the recent developments in the oil markets, Iran is again facing sanction for the testing of ballistic missiles which do not contravene the previous sanctions clearly states that US does not impose sanction on the existing exploration and production but Iran can now no more expand in the field of exploration by inviting foreign companies to explore new fields under it. Apart from this step, US is in no mood to relax. It wants to cash in every opportunity which comes its way. The four crude oil basins in US from which maximum amount of crude oil is extracted has shown an increase in the number of rigs from January to February, 2017.

Overall, rig count has also shown an upward trend from the increase of 92 to 158 rigs and is currently standing at 729 operational rigs which means production has started in those rigs which was earlier halted due to low oil prices.

Nigeria, another thorn in the route for the production cut. The aforementioned country is going through turbulent times in the recent decades because it is an oil dependent economy and if statistics are to be believed 90% of Nigeria revenue is through oil export. These revenues have dried up because of domestic factors.

Nigeria is going through some tough times as there are some local militant organizations which are continuously bombing Niger Delta which is the main source for oil produce for the country. Recent reports have suggested that till now 3 pipelines in the south have been bombed by them. The demand from these organizations is that oil revenues coming to the country should be used to alleviate poverty rather than filling the pockets of corrupt officials. But there are talks going on between Nigerian government headed by Mr. Muhammadu Buhari and militant organization to stop bombing the pipelines so that the country can resume its oil exports. The ray of hope for the oil dependent economy came when President said that his country might produce a whopping 2.7 million barrels per day which is a very staggering amount of production and this might disturb the calculations of production cut. Since Nigerian economy had dual troubles such as falling oil prices and terrorism and now as they are easing on one front as their first aim is to revive the economy. Small producers like South Sudan and Gabon might also disrupt the supply in short term.

Libya, with Africa largest crude reserves is another country which has not produced oil for the past 15 months as it was suffering attacks from the NATO forces after the ouster of dictator Muamaar Gaddafi has hit production approx 7,00,00 bpd and the plans are in place to increase the production to1.1 million barrels per day which again might send shock waves to OPEC production cut deal.

Saudi Arabia, the largest producer as well as exporter of the crude oil in OPEC is waiting for the much awaited IPO of Saudi Aramco which is diluting a stake of 5% in its $2 trillion valuation which comes around $100 billion making it the largest IPO ever. The IPO is as large as 4 times in size when compared to the previous IPO of Alibaba. An impediment also awaits Saudi as higher the oil price, more would be the valuation for the said company which clearly means that Saudi would cut oil production through the help of Aramco .Once the IPO comes Saudi might try and regain share in the oil market.

The overall picture looks a bit cheerful if we only see the Saudi side of the deal but on the other hand if we see countries struggling to find a place in the world oil market but has been stopped due to the domestic turmoil, the agreement future looks a bit sceptical. In the next meeting if the prosperous countries in OPEC try and compensate for the loss of revenue then some agreement can be reached upon.

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