XTB: OPEC has its hands tied

Joaquín Robles is a Bachelor in Business Science, with a specialization in Private Banking and Financial Counseling by the I.E.B. He is also an Account manager at XTB

Last week, OPEC members reached an agreement to limit daily output in order to boost oil prices, which have stood below $50 over the last two years. After negotiating for several months, the cartel agreed on reducing the output by 1.2 mbpd from current level of 33.6 mbpd. This announcement caused the largest weekly increase in oil prices since 2009 and brought back optimism to investors, but many analysts cast doubts on the endurance and effects of this deal.

The cut is equal to just 1 percent of global output, so it is unclear if it will be sufficient to boost oil prices. The OPEC member’s lack of credibility is another factor to take into consideration, as they agreed upon a reduction during the OPEC informal meeting held in Algeria last September, which not only was not accomplished, but turned into an output increase. The last time this organization established a maximum quota, its members exceeded it during 20 out of 24 months it lasted.

The great threat to this agreement is the fact that the rest of producers may take advantage of the rally in oil prices to increase their output or sell off stocks. OPEC controls one-third of global output, so no matter how much the OPEC cut its output as it will always be exposed to the decision of the remaining producing countries. Russia, Brazil, Middle East countries, North African countries and Nigeria have experienced an increase in budget deficit and debt during the collapse of prices, so they could take advantage of the situation to revert things.

The OPEC aims to stabilize oil prices between $55 and $60 per barrel during 2017. However, this price range may reactivate the interest of United States in continuing to develop the hydraulic fracturing technique, which caused the boom in supply that contributed to plunge quotes. This situation provoked the long delay in the OPEC agreement. Much as they try to control output to increase their income and strengthen their economies, they will never manage to control the market.

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