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|Firm commitment before oil reduction — this is the message that OPEC has been sending to the market. We must witness firm commitment from Russia before taking the second step of oil reduction in the coming months.|
The price of one barrel of oil is approaching $37, which is an improvement of $10 compared to its price of $27 last month. The reason behind this is the agreement reached between Saudi Arabia, Russia, Qatar and Venezuela in Doha last month to freeze oil production to the level of January 2016. This agreement seems to be working because it has resulted in better oil prices and there are expectations for the oil prices to reach $40 per barrel prior to the end of this year.
The next step of course will be to reduce oil production in order to balance the market, and for Saudi Arabia to lead in cutting down oil production, provided Russia and other non-OPEC members take a similar action. The issue related to Iran and its eagerness to produce additional volume will certainly be dealt with based on the agreed official production rate if the Iranian volume gets higher. Again, all this is conditional based on Russia’s commitment.
Any level of oil price above $50 will be alarming, as it will instigate the shale oil industry into starting production and perhaps expanding further. Therefore, OPEC has to be on alert and it must start monitoring the oil prices regularly to ensure the oil prices do not exceed $50 per barrel and to avoid being caught by surprise again.
The experience of last 18 months should teach oil producing countries that they cannot rely on one source of income and that they must do as much as they can to reduce subsidies and wastage in every aspect.
Another hard fact is that all oil producing countries are suffering from huge deficits in their budgets for the second year in a row. Some of them are facing this situation for the first time.
They have to either borrow from outside probably from international financial bodies, liquidate their investments or withdraw from their local reserves. This is actually bad news, considering the fact that the total borrowed amount will be exceeding $150 billion for Arabian Gulf countries.
For now, committing to freezing oil production should temporarily stabilize the oil prices but the next step should be reducing oil production, which will definitely be a challenge.
By Kamel Al-Harami – Independent Oil Analyst