MarketLine Blog

New potential OPEC-Russia deal to cut oil production levels: Other producers likely to boost supply in case of such a deal

The steep decline in the price of crude oil that began in the latter half of 2014 and reached its lowest point in early 2016 caused great disruption in countries for which oil exports constitute a major portion of total exports. Countries in this group include the OPEC nations as well as other major non-OPEC oil producers like Russia, Brazil and Canada. In December 2016, a Saudi led OPEC effort was finally able to come to an agreement with Russia and several other oil producers in the region such as Kazakhstan and Azerbaijan to reduce oil production levels. Although prices rose somewhat in the aftermath of this agreement, they did not rise enough to satisfy the signatories of this deal.

Therefore a new deal has now been signed by Saudi Arabia and Russia, which the rest of the OPEC members might join at a summit the group is supposed to hold later on in May. However despite these output decreases it is unlikely that oil prices will fall in any significant manner in the coming months. There are two main reasons for this. Firstly whilst OPEC nations rank as major producers of oil, they do not completely dominate the market, and therefore any reduction by them in output levels will simply leave space open for other players in this market to increase their supply and as a consequence increase their total share in the market. The US, Canada and Brazil are currently engaged in this process. Secondly major oil producers within OPEC too have been exempt from the previous Russia-OPEC deal due to a myriad of reasons. These include the likes of Iran, Nigeria and Libya, all of which have increased output levels in recent months. This will further undermine any effort by Russia and Saudi Arabia to bolster oil prices.

A further important point to note is that even if oil prices do increase somewhat, this only manages to encourage shale drillers to return to the market, as oil prices above $50 and especially above $60 ensure a steady profit for these players. Therefore any attempts by Saudi Arabia and Russia to increase oil prices indirectly results in encouraging new players into this market, whose presence increases competition and thereby brings prices down again. From this it can hence be concluded that oil prices are likely to balance around the $50 to $60 region in the coming months.

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