It may be too soon to measure the impact on the international crude market of an OPEC decision reached last winter to cut back on output, but current indications suggest the move’s objectives are not been reached.
OPEC, backed by Russia, decided to lower output with the objective of diminishing increased international crude reserves and offering support to oil price levels. The OPEC initiative also had another strategic objective in mind, to maintain long-term control for the cartel, or, more specifically, Saudi Arabia, over the international market, now subject to changing forces.
Several months on, output has been restricted by 1.2 million bpd and oil reserves have been reduced at a slower-than-expected rate, as higher prices ended up prompting the US to reinforce its output.
Two days ago, the Brent index stood slightly above 50 dollars, the level it was at on November 29, 2016, a day before the OPEC agreement was signed. Yesterday, the Brent index fell to just under 50 dollars.
Latest data has shown a rise in the number of oil drilling projects being conducted in the US. This is not good news for Riyadh, especially given the support being provided by the USA’s newly elected Republican administration, already moving to dismantle environmental restrictions as a means of boosting American output.
OPEC members are scheduled to meet next month to decide on whether to extend the cartel’s current output cutback, a six-month agreement. Analysts confidently forecast a renewal of the deal as, otherwise, oil prices could collapse.
From a wider perspective, the overall market conditions of recent times have served Saudi Arabia’s interests well. Low oil prices of the past two years or so have restricted international oil industry investments in new production to historic lows.
Even so, Riyadh cannot draw any conclusions for a few more years. Saudi Arabia needs a further boost amid a changing environment in which the role and impact of OPEC in the international oil market has clearly changed. Long-term prospects suggest the cartel will need to try and salvage whatever it can from a glorious past.