OPEC makes history in Vienna
OPEC Bulletin Commentary November-December 2016
When the major international energy exchanges opened their doors for business at the beginning of 2017, they were greeted by a positive air of anticipation and expectation not experienced on trading floors for quite some time. Thanks to OPEC and a group of leading non-OPEC producers this year’s opening took on a very special significance. That is because January 1, 2017 signified the activation of the landmark OPEC/Non-OPEC crude oil production accord. Reached in Vienna, Austria, in early December 2016, the agreement entails 24 of the world’s leading oil producers committing to removing around 1.8 million barrels/day of crude oil from global supplies from the beginning of 2017 over an initial six-month period that can be extended for another six months. The principle aim is to help ease an ongoing oversupply situation and importantly reduce a stock overhang that has been delaying the much-needed rebalancing of the oil market. It should also lead to a return of investment that is vital for the future of the sector.
Since December 10, 2016, when the historic ‘Declaration of Cooperation’ was forged in the Austrian capital, industry experts and analysts have been busy dissecting the decision, which came after many months of intense discussion and deliberation. They have been scrutinizing its workability, its likely impact and especially the seriousness of the producers that have signed up to it. The response across the entire international oil and gas chain has been positive. There is a widespread belief throughout the sector that the producers are determined to correct the oil market imbalance, which now represents the longest downturn in the industry’s history.
Understandably for OPEC, reaching this agreement has been immense. It is the culmination of many years of hard work and repeated appeals for producers to band together to form a unified front in tackling the problems facing the industry. In fact, this Bulletin’s editorials have been part of OPEC’s past efforts at bringing producers around a common negotiating table. That finally happened at the OPEC Secretariat on December 10 last year, just a few days after OPEC itself agreed to reduce production by 1.2m b/d. A group of 11 non-OPEC countries, led by the Russian Federation, then agreed to make their contribution — with an additional reduction amounting to almost 600,000 b/d.
It was a significant decision, in fact the first time in 15 years such an arrangement between OPEC and non-OPEC producers was made. And as senior OPEC officials have stressed, the tripartite OPEC agreements reached in 2016 — the ‘Algiers’ Accord in September, the ‘Vienna Agreement’ in November, and the ‘Declaration of Cooperation’ in December — have taken a lot of time, effort and dedication by many devoted individuals to bring to fruition. It all capped a year that will forever go down in OPEC’s history as one of its most challenging, yet perhaps most rewarding.
There has been no doubting the positive vibes sweeping through the oil sector. In fact, from the very moment the accord was endorsed by the 24 signatories on December 10, news agencies were announcing a firm rise in oil and gas prices, buoyed by a confidence not seen in oil circles since before the summer of 2014. And on January 1, 2017, when the accord became ‘live’, the first trading moves of the New Year came under close scrutiny. Just how would the markets perceive the much-lauded agreement now that it was physically in being? Again, all the news was good. Prices once again rang out their endorsement, rising by around three per cent from 2016 closing levels. This painted a completely different picture for the OPEC Basket of crudes. At the beginning of 2016, it opened at a depressed $31.79/b. In January 2017, it stood at over $53/b. In fact, and mostly as a result of OPEC’s untiring efforts, international crude oil prices in 2016 surged by some 45 per cent in value, the largest annual gain since after the global financial crisis in 2009.
Of course, despite the euphoria, the industry is not out of the woods yet. But December 10, 2016, was the start of something considerable and meaningful and which points to the determination and resolve of OPEC and its Member Countries who have been working towards this moment for some considerable time. It is also important to stress that the agreement comes with a lot more than just the six months arbitrary action. There is a monitoring system in place and a structure under which enhanced relations between OPEC and non-OPEC producers will be institutionalized and taken to their highest level. It all certainly augurs well for the future.
In a world where interdependence is increasingly seen as the bedrock of growth and prosperity it is indeed gratifying that OPEC’s voice of reason on the need for concerted cooperation and coordination of action on oil affairs has finally been heard. Since its inception over half a century ago, the Organization has never wavered from its determination to pursue this goal. It rightfully feels that the stakeholders that benefit from the oil market when it is functioning properly also have to play their part when things go wrong. The OPEC/non-OPEC ‘Declaration of Cooperation’ promises to correct that anomaly. The OPEC and non-OPEC producers that signed the Declaration now need to show the global community that they can work together and that together they can make a difference. This is about unity, it is about solidarity and it is about personal sacrifice for the eventual general good of all!
