OPEC’s agreement last Thursday was reached smoothly within a short time. All members of OPEC as well as Russia and other non-OPEC countries unanimously agreed to the historic deal that will last until the end of the first quarter of next year.
This accord was reached and enforced because of the prior understanding reached between Russia and Saudi Arabia. Without Russia and its commitment to OPEC’s resolution, such a deal would have just been a dream without any positive effect or impact on the oil market.
Russia is the largest oil producing country with a daily production rate of over 11.5 million barrels and with over 100 billion barrels of oil reserve. It is also the largest producer of gas. Without its involvement and its influence on other OPEC members such as Iran and Iraq, the oil prices would have still been in the range of $30-$40 per barrel.
Last year, Saudi Arabia realized that it could not manage the market alone, considering the increasing production of shale oil at a fast pace such that the production rate is now more than five million barrels per day, which is over 50 percent of the total US domestic crude oil production.
Therefore, it had to reach some sort of understanding with the biggest producer, which was receptive. This helped in reaching a deal in no time, paving way for the famous agreement in November last year to cut production by 1.8 million barrels per day. This pushed oil prices to reach above $54 level, with the full involvement and support of Russia by reducing its own crude oil production.
The current glut oil situation is going to last for more than six months, which is beyond what OPEC had initially thought would be enough through daily production cuts of 1.8 million barrels. Last Thursday agreement has rectified the resolution, deciding on production cuts of an additional nine months until the end of the first quarter of next year in order for the market to use up the surplus oil.
Oil prices will remain firm and steady from now on, with full cooperation of OPEC and Russia as well as other non-OPEC producers. In this manner, the oil prices will remain in the range of $50 and above.
As long as there is commitment from all to the agreed production cuts, oil will remain stable and will help generate increase in demand. Hopefully, this will in turn make room for increase in production of additional volumes but gradually and with caution.
The involvement of Russia and its cooperation with OPEC is the reason why oil prices are sailing smoothly.
By Kamel Al-Harami
Independent Oil Analyst