Kicking the Oil Can
By Isaac Cohen*
The approval by the Organization of Oil Exporting Countries (OPEC), last week in Algiers, of a modest cut in oil production was received with skepticism by some bank analysts.
The agreement was to cut production by between 240,000 and 740,000 barrels per day (bpd), from last August production level of 33.2 million bpd. The proposed reduction is equivalent to 1 percent of world oil production and the details, of how much each one of the fourteen OPEC members will cut production, were postponed until November 30, the date of their next meeting in Vienna. For this reason, experts from Citigroup and Barclays described the decision as “kicking the can down the road yet again.”
However, the market reacted positively and oil prices jumped by more than 5 percent, to more than $48 per barrel. This may be seen as recognition of the change in policy by Saudi Arabia and other Gulf producers, aimed at returning to production regulation to influence prices. As declared by the Saudi Energy Minister, Khalid al-Falih, the market needed “a gentle adjustment.”
The International Energy Agency estimated that if production is cut by 200,000 bpd, the present overproduction could be eliminated in about one year. But if production is cut by 700,000 bpd, the glut would disappear by the start of next year.
*International analyst and consultant. Commentator on economic and financial issues for CNN en Español TV and radio. Former Director, UNECLAC.