With Opec members meeting today, is the cartel’s output pledge sustainable in the long term?
It was fanciful thinking, and not entirely desirable, that Opec’s pledge to reduce output would take prices back to the levels last seen in 2014 when it came into effect in January. What it has achieved is to bring a degree of stability to oil markets after several years of volatility and imbalance threatened to lead to investment cuts in the sector. For this reason, both Opec members and non-members who agreed to cuts should see no reason to renege on the agreement in the medium to long term. While some will be concerned to see the likes of Nigeria and Libya increase production in recent months, the biggest players are seriously considering further cuts. A move from Saudi Arabia to further reduce output would not be a surprise – if it can gain support from other Opec members. However, whether such cuts could see oil rise to $60 per barrel – or even consistently breach the $50 watershed – is yet to be seen.
Opec’s pledge to limit production is unsustainable. The deal is flawed. Several countries from the 14-member cartel are exempt from any production cuts, undermining the efforts of the rest of the group. Many countries from the group have failed to adhere to their targets. Ecuador has thrown in the towel, publicly announcing it will no longer try to comply. While Saudi Arabia – the largest member – cut production deeply at the start of the deal, it has been increasing production every month since. That leaves other countries’ lack of compliance even more apparent at a group-aggregate level. While the deal was famed for bringing in non-Opec countries to the table to cut production alongside the cartel, the monitoring and transparency of production levels from these outside partners is lacking, putting into question just how much production is declining. At the same time, countries not participating in the deal, like the US, are increasing production and taking market share away from the cartel. Opec members will not give away market share indefinitely.