OPEC Will Extend The Cut
There will be an OPEC deal extension—no matter the public tussling between opposing forces in the industry cartel—if the
world's largest oil producers are really determined to end the supply glut.
A failure to agree on the market remediation would cause oil prices to plummet immediately, forfeiting any gains that
have been made in the last year.
Saudi Arabia needs $60 per barrel for its Aramco initial public offering to be a success in the second half of next
year. It plans to sell just five percent of its prized company in the largest IPO in financial history, but a low price
could force the country to sell a larger share, siphoning off government revenues at a time of strained budgets.
Aramco's IPO is important not just for Saudi Arabia's non-oil future. As one of the world's most efficient and low-cost
oil producers, its longevity can be seen as an indicator of how the larger industry will fare. An unstable oil
price—fueled by the indecisiveness of OPEC members—will trigger an extended period of low oil prices as demand continues
to grow. In the short to medium term, this will heighten demand as consumers in the market for new cars will likely put
off buying expensive hybrid or electric cars due to the plethora of cheap fuel. Similarly, the pace of natural gas and
renewables adoption by utilities companies will slow as oil floods the markets.
Pushed to the edge, the leanest oil companies will buy out their bankrupt contemporaries, continuing the consolidation
trend that has dominated the sector over the past two years. But in the long run, dwindling exploration budgets should
stagnate the industry's development.
None of this would correspond to an ideal situation for any of the OPEC countries. All members are charting their
economy's course out of oil. The Gulf is using its savings, stored in huge sovereign wealth funds, to retrain its
workforce, build industrial cities, and find a new niche. Algeria, Venezuela, and Nigeria are suffering through the
political blowback of years of corruption and mismanagement. Their civilian populations ask where decades of oil profits
are now. They question how their nations fell so deep into the oil curse and demand change—whether economic or
political.
Prices need to rise for these governments to afford wars against terrorist groups in the region (Boko Haram for
Nigeria), medical supplies for its ill citizens (Venezuela), and salaries for the massive public workforce (Algeria).
For some countries, the final years of oil's dominance in world energy markets will fund the diversification of
over-dependent yet semi-developed countries (Saudi Arabia, the UAE, Kuwait, and Qatar). In other cases, it will spell
the end of entrenched corruption (Algeria, Nigeria, Venezuela, Angola) or provide the capital to reconstruct entire
cities torn by years of conflict or sanctions (Iraq, Iran, Libya).
The world's top oil and gas exporters know their trophy commodity's days are numbered. They are in search of anything
that will allow the last of the glory days to be as profitable as possible, and a ‘no deal' on an extension agreement
simply won't cut it.
"We're in extensive consultations with all our colleagues around the world within and outside OPEC and we can't make any
statements at this stage until we get to Vienna [at the end of the month]," Saudi Oil Minister Khalid al-Falih told
reporters coyly last week. "Everybody wants to call it the right way, but stay tuned and you'll find out when I find out
in Vienna."
Consider al-Falih a fan of the will-they-won't-they romance between OPEC and its commitments. All political and economic
incentives, however, point toward a green-light for an extension.
To keep a closer eye on all of OPEC's oil prices as this situation develops, you can check out our Oil Price Charts page.
Link to original article: https://oilprice.com/Energy/Crude-Oil/OPEC-Will-Extend-The-Cut.html
By Zainab Calcuttawala for Oilprice.com
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