Commodities Corner: U.S., Russia overshadow oil market’s ‘collective sigh of relief’ for OPEC’s output-cut deal

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Markets/commodities reporter

A Friday decision reduce oil production by OPEC and its allies provided a lift to prices, but analysts are questioning the long-term relevance of the cartel as Russia and the U.S. take on greater roles in the oil market.

The Organization of the Petroleum Exporting Countries said its members would cut 800,000 barrels a day from October’s levels for six months, beginning in January. The statement didn’t specify the output cut by nonmembers, which include Russia. News reports have pegged the nonmember cuts at 400,000 barrels a day to bring the total reduction to 1.2 million barrels a day.

“A collective sigh of relief was felt across oil markets” after news that the producers successfully reached an agreement to cut output, said Lukman Otunuga, research analyst at FXTM. “This breakthrough in talks is a welcome development for financial markets and is seen supporting risk sentiment during the upcoming trading week.”

The news follows a drop in oil prices of more than 30% to more than one-year lows by late November from nearly four-year highs in early October.

Global benchmark Brent crude LCOG9, +4.18%  fell from a settlement of $86.29 on Oct. 3 to a more than one-year low of $58.71 on Nov. 30. U.S. benchmark West Texas Intermediate CLF, +0.89%  sank to $50.29 in late November to its lowest since October 2017, from $76.41 in early October.

On Friday, January WTI crude rose 4.3% to $53.71 a barrel, while February Brent crude traded at $62.73, up 4.5%.

Stephen Innes, head of Asia Pacific trading at Oanda, said oil “prices should stabilise, and then the bleeding should stop.”

However, he questioned whether OPEC would be able to retain its relevance in the oil market long term. “What about OPEC going forward? Personally none of this will soon matter as the new kids on the block, the new mega super producer[s] Russia and USA, will have continued” to fight for a “controlling interest in oil prices and by the law of nature, only the strong survive.”

Long term, Innes said he believes the “oil markets will eventually be controlled by [those] giants.”

The U.S. became the largest crude-oil producer in the world this year, according to the Energy Information Administration. In a monthly report, it estimated that domestic output averaged 11.4 million barrels a day in October. And Bloomberg reported Thursday that the U.S. became a net oil exporter last week after 75 years of dependence on foreign oil.

Meanwhile, Russia has less of an incentive to cut than OPEC members do.

“OPEC countries need a higher oil price,” with “much of their countries’ budgets com[ing] from oil revenue,” said Matt Badiali, senior research analyst at Banyan Hill Research, specializing in oil and commodities. “Fields are aging, so production costs more. They need higher prices.”

“Russian oil companies aren’t in that boat, so they see production cuts as a negative,” he said.

Read: Here’s why Russia may still be reluctant to go along with a Saudi-led cut in oil output

That all points to trouble down the road. The market’s “worse fears were alleviated that some semblance of compliance exists,” said Innes. “Yet there remain numerous fissures in this alliance. OPEC still counts “in current form, but how long smaller members want to be pushed into deals is a huge question market.”

Qatar announced its decision last week to leave OPEC, which also raised red flags for the market in terms of the possibility for an ‘OPEC-less’ future.

At the time, Qatar’s Minister of State for Energy Affairs Saad Sherida al-Kaabi said the withdrawal decision reflects his nation’s desire to focus on plans to develop and raise its natural-gas production.

Read more: Qatar’s OPEC exit raises the possibility of the oil cartel’s demise, experts say

Still, some analysts believe that the Saudis are actually building their power in the oil market following Friday’s decision.

“The key to power in OPEC is spare [production] capacity and the ability to crash prices if other producers do not agree to cuts,” said James Williams, energy economist at WTRG Economics.

The Saudis “have a little less [power] mostly because their spare capacity is a little lower,” he said, noting that the country had as little as one million barrels of spare capacity in October. However, “if the Saudis want, they can add—within a year—another million barrels a day to their spare production capacity.”

“If they double that [spare capacity], they rule without any questions,” said Williams.

Saudi Arabia raised production by over 600,000 barrels a day between April and September, in the run up to U.S. sanctions on Iran’s energy sector, said Badiali. “They have plenty of room to cut.”

Still, even as the meeting’s decision Friday dominated the news headlines and lifted a major uncertainty in the market, questions remain.

The bigger takeaway from the oil-producer meeting Friday “is what the Saudi energy minister would possibly have on his mind as he leaves Vienna: a Russia that has become as powerful to OPEC as Riyadh, and a U.S. that is now a net exporter of oil,” said Barani Krishnan, senior analyst at Investing.com.

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