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John Hall: An Overview of the 166th OPEC Meeting

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Today, some would have expected OPEC to have imposed a dramatic reduction in output but how would this be orchestrated? Would they have expected Saudi to cut so that the rest of them could step in and capture market share? Saudi doesn’t think so!

There are many scenarios to be taken in to account and it may be argued that the Saudi agenda goes further than to just take a commercial decision, to restructure the market and allow supply and demand to balance out naturally. The oil price has an impact favourably on many current geo-political situations:

  • Reinforcement of sanctions on Russia over Ukraine and its general strategy in the region and around the external borders of pro-Russian countries, such as Serbia which has recently welcomed Putin
  • Reinforcement of sanctions on Iran over its nuclear programme which could speed up settlement
  • Lowering of long term gas price contract prices which are linked to oil price
  • Support for struggling OECD member countries to get out of long term recession
  • Lower distribution costs as refined product prices fall, namely Diesel & Gasoline

Conversely there are negative implications elsewhere:

  • Curtailment of Shale development in the US
  • Lack of capital funding
  • Reduction of development in energy resources, renewable and otherwise.

In effect, from purely the energy aspect, does the world want to have adequate supplies of energy at a higher price and that is a price not driven by demand but one driven by cost, or, less choice in energy options with unsustainable supplies at a lower, yet uneconomically produced price? Somewhere, a balance needs to be struck and I have maintained since 2008 that a price for Brent crude over $100 is not sustainable. Furthermore, I did not expect to see such a dramatic fall in prices since the Meeting in June. I don’t believe many did.

The market has ignored most geo-political tension points – in the Middle East, increased tension between Israel and Palestine, which years ago was the key driver in the region, the war in Syria, the rise of the Islamic State and its impact on Kurdistan & Iraq and Turkey, leading to the return of US troops to the region and yesterday, Yemen’s export pipeline was again blown up. Ironically, Hamas which is supporting Palestine has even said that IS is a greater threat than Israel while, the uncertainty of the overall impact of IS on Iraq could curtail long term development in the region.

Elsewhere, the division of Libya and the civil strife that has followed, the curtailment of Iranian output by sanctions, exacerbated by the failure to reach a settlement this week over the nuclear programme and, ultimately, the threat of reduced gas supplies from Russia will all have a knock on effect. Natural events, like cold weather in the US and Europe, as we move in to the winter period, usually cause an increase in price. But, for now, the oil price just has not responded! Perhaps apathy has set in and markets have for too long over reacted to every potential crisis when, more often than not the threat has been resolved.


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