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November 17, 2019

OPEC and Russia quota deal faces new extraordinary problem

OPEC dealWhen the Organization of Petroleum Exporting Countries (OPEC) and Russia meet this weekend to review their strategy to reduce the global oil saturation, they will face an extraordinary problem: it may work too well. While their quotas, coupled with robust global demand, tighten the market, the crude oil prices rose to a three-year high of about 70 USD per barrel. This has led to warnings for a new US production growth, which destroys OPEC’s efforts.

The big concern is price and if they worry that prices are rising too fast? There are many reasons for concern, but the top of the list is how US production will respond.

Given the huge oil surplus, which is still available, the UAE, Iraqi and Kuwait ministers insist that there is no need to change the strategy and that the cartel will stick to its plan to limit yields by the end of the year. However, the surge in prices means that delegates gathering in the Man’s capital should decide how to get out of quotas.

The deal between OPEC and other producers, including Russia, was concluded in 2016, joining forces to deal with the US shale boom and lowered prices. For most of 2017, they were experiencing difficulties as global reserves remained high and prices low.

But the strategy gained strength in the second half of the year. The prices have reacted, and Brent oil futures reached 70.05 USD per barrel on January 11, which was the highest level since December 2014. While this gives the producer countries some reassurance, it also has the corresponding problem. As a result of new investments, the production in the US could reach 11 million barrels per day during the year, surpassing Saudi and Russian yields, shows the official government forecasts. For comparison, the estimate for 2017 was 9.3 million barrels per day.

However, the rising demand for crude oil will help to erase some of the extra production, as according to OPEC the global consumption will expand by about 1.5 million barrels per day this year.

The oil producers will officially review their agreement in June and may start to cut quotas in the second half of the year. Saudi Arabia and Russia have repeatedly stressed that when the time for the deal ends, this will be done gradually. At the same time, the pressure to change the strategy will probably ease in the coming weeks with the depreciation of oil. The futures will fall together because of lower seasonal demand, as the need for winter fuels is over, and hedge funds are earning the last rally.

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