A ‘larger’ oil cartel may emerge

A ‘larger’ oil cartel may emerge

OPEC, oil production, ONGC, FICCI, Oil prices, Iran, Saudi Arabia
OPEC logo is pictured ahead of an informal meeting between members of the Organization of the Petroleum Exporting Countries (OPEC) in Algiers, Algeria on Wednesday. REUTERS
Sectarian differences among OPEC members might scuttle an ‘agreement’ to cut oil production.

For oil importing countries, OPEC’s decision to cut its oil production on assurance that influential non-OPEC producers (Russia) would also join in, seems like a collusive tactic to force oil prices up. Oil prices, which have fallen by over 70% in the past two years, have dramatically reduced the exports earnings of all OPEC members, thereby “putting strains on their fiscal position”, as OPEC puts it. Before Russia and others join in formally (though many feel that Russia is already in), the OPEC has reached a rare consensus among its 14 members to cut the group’s production by about half-a-million barrels per day. It is the first ever commitment by OPEC to collectively cut its production since oil prices started falling in early 2014. The proposed move has upped oil prices by 5%, sent global energy stocks soaring but has left oil importing countries sulking.

“I see this understanding (among OPEC) with a lot of suspicion,” says R.S. Sharma, head of FICCI’s hydrocarbon committee and former chairman, ONGC. “There are a lot of sectarian differences among OPEC members — most notably between Iran and Saudi Arabia — which might scuttle the success of this agreement. How individual members respond to this collective agreement (to cut production) is something to be seen. Who would be producing what quantum of oil is yet to be decided and that is where individual calculations might differ,” says the Delhi-based energy expert. Many, especially the poorer members of the cartel, would still insist that the Saudis make a bigger sacrifice (cut) to keep the consensus going.

Higher oil prices, resulting from the OPEC’s decision to cut back production, is ‘likely to have a cascading impact on India’s fiscal scene and inflation dynamics.’

Oil earnings have been the lifeline of OPEC and Russia that together produce about half of the global oil. Traditionally, both having been fierce rivals, are eying the same global oil market. “Russia joining hands with OPEC is a big news which may take oil up to $60 a barrel. Any further escalation in oil prices would depend on global oil demand which looks quite weak at the moment,” feels Sharma. The global oil market remains oversupplied by 1.5 million barrel/day, and therefore someone (other than OPEC) has to cut more to “balance’ the market.

Lower oil prices have greatly benefited India that imports over 80% of its crude oil requirements, mainly from the OPEC. Cheaper energy imports have helped it to keep inflation under control. This may change now. Higher oil prices, resulting from the OPEC’s decision to cut back production, is “likely to have a cascading impact on India’s fiscal scene and inflation dynamics”, says Abnish Kumar, Director & research head, Amrapali Aadya Trading & Investment. 

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