The deal signed yesterday by the OPEC countries confirms the expected output cuts, an agreement to which Saudi Arabia has also subscribed. The decision was met with enthusiasm by the markets, with oil prices that started climbing since the morning the likelihood of an agreement growing. In fact, only one day prior, the situation seemed a lot less certain, given the reticence to coming to terms on an understanding on output cuts expressed by several member countries.
Things did not appear too bright 24 hours earlier when there was still a lot of confusion with claims and counter claims from the various members with some even advising other members on what they should be doing! Though the formal OPEC meeting is happening today, the discussions about the meeting and a possible deal began more than a week ago and initial reports were encouraging as there seemed to be general agreement between the various members on the need to cut oil production and who should we cutting how much as well.
But then the cracks began to appear. Member after member wanted to back out of the deal and they were joined in and egged on by non-OPEC members as well. Initially Saudi Arabia refused to agree for a cut and once they were brought around to accept, Iraq and Iran played truant and they refused to cut and then they finally agreed for a freeze and the narratives kept twisting and turning as we entered the week. This brought in a lot of pressure on the oil prices and it tested the range lows at $45 yesterday as a deal began to look highly unlikely. But just like last time, everything seemed to start falling into place at the last opportunity. The OPEC members have met today and finally things have suddenly started to fall in place.
Despite the agreements, uncertainties remain
Now that we finally have a deal, something that seemed quite improbable just 24 hours ago, it is now time to focus on what impact it is going to have on the oil prices. A part of it is clear already as we have already started seeing a sharp rally in oil prices. This rally began in the morning and has been going on for some time now and WTI oil prices have now risen by more than 6% for the day. This sharp rally is likely to continue for a day or two as the market begins to digest the details and work out the feasibility of the deal and conclude on the viability of the same. This is likely to carry the crude oil prices above $50 and towards $53 where it is likely to run into a lot of sellers like the last time it did so. That is why it is important to watch the price action when the prices near $53 as the rally might run out of steam by that time. We also have some unknowns as part of the deal as the deal is only between the OPEC members and now this has to be discussed with non-OPEC members like Russia and agreed by them as well. And then there is the case of how the implementation is going to proceed and how long the monitoring is going to happen and till what time the deal will actually hold.
With so many unknowns, the initial sharp rally is likely to be sold into and after a decent correct back towards $49, we are likely to see a slow uptrend begin again as more details emerge and the unknowns become known one by one. Looking at the bigger picture and considering what is likely to be agreed upon, we believe that oil prices around $55 would be the median price for oil in the medium term.
But a lot of it would depend on how the OPEC and non-OPEC members work together to ensure that they stick to the deal. It is bound to affect their economies and some countries are likely to be more affected than the others. But it is clear that a lot of politics will also come into the picture in due course with those not involved in the oil production also likely to influence the producers and achieve short term political gains. This is the reason why the OPEC members have been dilly-dallying for the past several months on this deal but now hopefully they have decided to come to a long-term agreement which will help sustain the oil prices for the medium term.