Will “OPEC” succeed in the implementation of the final Vienna agreement?

Will “OPEC” succeed in the implementation of the final Vienna agreement?

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World oil prices jumped above $ 55 a barrel for the first time in 16 months, after the Organization of Petroleum Exporting Countries agreement (OPEC) to reduce production In November 30, 2016, in the Austrian capital Vienna.

Agreement, which described the historic  agreement of  OPEC mandating  of the reduction of total production, with effect from January 2017, by 1.2 million bpd to 32.5 million bpd .The price of oil immediately jumped 9-10% to around $ 52 and then to $ 55 yesterday. OPEC also expects to get a further reduction from producers outside OPEC by 600 thousand barrels per day, and  the agreement will continue for six months until the next ministerial meeting in May in May 2017.

In fact  the agreement itself is an important achievement in terms of principle, an agreement came after several meetings and gatherings to curb the collapse of global oil prices, and reduce the oversupply of the market, and taking into account some of the affected countries beyond the control of, such as Libya, Nigeria and exempted from any reduction conditions or fixing of  production but with this positive step calculated for the organization, but the way it seems to remain so long  in front of the whole and discreet agreement, which showed the first increase following the agreement, where  OPEC production hit a new high in November, prior to entry into force of an agreement to cut production where  the OPEC supply  has been increased to 34.19 million bpd in November from 33.82 million bpd in October, which is to say that enhances the organization’s mission will not be easy under the first agreement to reduce production  signed by the organization  since eight years ago.

Obstacles in the way of agreement

The achievement of OPEC  agreement    are facing  many challenges that must be taken into consideration,

  • Political factor: is one of the most important factors that may pose a real obstacle in the way of any real agreement between the member states of the organization, and the political factor played an important role in shaping and making the relationship between the members  and thus reflected  on the decisions  issued by  the organization and everyone knows the tense relations between the Gulf countries and Iran , while there is a consolidation of the positions between Iraq and Iran, and others of the forms of relations among states in the organization.
  • The issue of commitment: agreement of the members within OPEC are of the most common problems faced by the organization since its inception in the tenth of September 1960,   a matter of disputes between members and the absence of an agreement had formed  the biggest obstacles in the march of the organization’s work, add to that the issue of overlapping economic interests of its member states and its impacts on the relationship within the organization, which may also constitute one of the obstacles in the way of the new agreement, due to the impact of the price of a barrel of oil on the budgets of these countries, and  we noticed  what happened in Venezuela on the verge of economic collapse, as well as countries such as Iraq and others.
  • non-members producers : The organization recently revealed the forthcoming meeting in December 10  in Vienna  to meet with oil producers outside the “OPEC” for the first time since 2002, as we mentioned earlier   the expectations were that the producers outside the Organization  to reduce of 600 thousand barrels per day. But countries such as Mexico, Norway, Indonesia, Kazakhstan declared its non-participation, while Russia has been noted by agreeing to a reduction of 300 thousand barrels, but gradually slow, and did not explain the method  of expense of  its reduction , which  organization  is trying to reach  to an understandings with these countries to move in agreement ahead
  • Glut of supply and demand: adopt this issue on the former factors , where the lack of commitment of members and non-members is meant  a survival  of the glut of oil supply in the markets, and therefore   the supply will excel  to the demand from again and  automatically  prices will be declined , especially with the increase of  the production of the states  largely in anticipation of the season of the next summer, which means plunging markets about supply of oil, and with respect to the global demand for crude, the figures suggest weakness in the global economy, especially the Chinese economy, which is suffering a recession for some time, may  the stability of the oil market will have a positive impact on the global economy, but the latter needs a lot of measures to overcome the crisis of the recession  and  the  sharp rise of the dollar  which was not seen before at all, as it recorded a 40% increase from the lowest level it reached in 2011, which would increase the fragility of the global economy more and more.
  • Recovery of shale oil: the «OPEC» agreement has brought the life to the US shale oil after shares in raising rates, as the issue prices are  of the most important obstacles that weakened the shale oil industry during the past two years in the absence of the cost price of the barrel, which is the  adequate price  for a barrel of  shale oil of $ 55 and above, which is what we have noticed that the price of a barrel of oil fell to below $ 30 a barrel, and has caused  to close  dozens of wells and companies working in the industry but is expected to compete back again in the oil markets if prices remained above the level $ 55 a barrel, and thus we return to the question of oversupply with declining  of the demand.

In conclusion, OPEC is on its way to a meeting with producers from outside the organization, and this is a good step for the success of the agreement and the safety of its implementation, the next meeting is very important to involve all producers in the agreement, but that the concerns that it may encounter the agreement are the absence of a commitment within the organization as well as non-member states , so to talk about the success of the agreement needs  enough time  to reveal about the commitment of these countries or not, not to mention the challenges associated with the decision to reduce production and rising prices, and the issue of untraditional producers  , so oil markets need the agreement of all producers in the world and is the best way for any   successful oil deal  , however, to hope that the next meeting in Vienna carries with it the seeds of a broader and more comprehensive agreement, and until then it is unlikely that we see stability in oil prices, which are expected to be dominated by a wave of volatility in the coming period.

Amer Al-Omran

Translated by : Mudhaffar Alkusairi

Rawabet Center for  Research and Strategic Studies