Oil pact between Russia, OPEC could be historic

Oil pact between Russia, OPEC could be historic

By SHAILENDRA TYAGI | NEW DELHI | 17 September, 2016
Many analysts agree that while geo-politics may have some influence on prices, the predominant catalyst for oil prices would come from global demand.
The coveted agreement between Russia and OPEC, two major rivals of the global oil market, to cap their oil production at current levels or cutting it down a bit, may be reached later this month. The desperate desire for the proposed pact, which aims to manipulate oil prices up, is growing louder among all oil producers. The continuing slump in oil prices has dramatically reduced their export earnings and has made the search for non-conventional (shale) oil unviable. (Brent) Crude, currently priced at $45/barrel, is about 70% down since its heydays of $140/barrel back in early 2014. No wonder that the American shale lobby is also discreetly praying for the consummation of such a pact which, if reached, would be termed as “historical”. Oil importing countries such as India might deem such a truce “unethical”.

“The politics behind the proposed meeting looks much stronger than the mere economics of it,” feels Lydia Powell, energy analyst with the Observer Research Foundation.  She agrees that Russia and OPEC (a 14-member oil cartel) which together produce about half of the global oil are indeed capable of using the oil market for political gains and vice versa. But as Russia and Saudi Arabia, two of the biggest oil producers, are actually the rivals in the oil market, “I do not see a firm agreement coming out of the proposed meeting”, says Powell.  And, whether Iran (OPEC’s founder member), which has come back to the oil market after years of exile, agrees to any such cap, is another reason that, many feel, would scuttle the likelihood of any such agreement being reached. Many (poor) members of OPEC like Venezuela and Algeria would indeed be supportive of any move which takes the oil prices up.

But what if foes do become friends to make a bigger (than OPEC) cartel?  Even then “oil prices would respond more to demand and supply dynamics rather than on such moves,” says Powell. Many analysts agree that while geo-politics may have some influence on prices, the predominant catalyst for oil prices would come from global demand which continues to look un-inspiring. Oil analysts feel that only a meaningful cut in production levels (rather than freezing at current levels) can actually cheer the oil prices.

Oil prices going up may not be a desirable thing for India. “Besides being (politically) favourable to the Narendra Modi government, low energy prices have worked well for the Indian economy as a whole,” says Powell. Lower prices have emboldened the government to undertake structural reforms on the fuel subsidy front, besides keeping the twin deficits within a desired range.

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