Bah, humbug!

Author Toby Shelley

Front-month Brent up by 4pc at $56.50/bl is Christmas come early for oil producing countries — for those that celebrate it at any rate.

Front-month Brent up by 4pc at $56.50/bl is Christmas come early for oil producing countries — for those that celebrate it at any rate.

And the seasonal gift is, arguably, undeserved. After all what did the collection of disparate producer countries come up with on 10 December in Vienna?

Let’s take the bah, humbug approach for a minute

  • The agreed reduction in output was 558,000 b/d — less than the declared target of 600,000 b/d
  • The communication issued at the end of the meeting conceded that “managed decline” was eligible as a contribution, not just straightforward cuts.
  • Lukoil vice president Leonid Fedun has already explained how Russia’s 300,000 b/d cut from a record high in November is not really much of a cut at all. Seasonal maintenance generally trims around 150,000 b/d from output in the spring and another 150,000 b/d could be pared from low-efficiency operations in western Siberia that have high water levels in their output.
  • Kazakhstan said before the meeting that all it would do was delay 2017 output increases until the second half. The minister described his country’s 20,000 b/d contribution as “purely symbolic”.
  • Mexico has so far insisted that its 100,000 b/d contribution will be purely from field decline, bursting the bubble of Algerian reports that it would be in addition to field decline.
  • Azerbaijan’s output is falling anyway so its 35,000 b/d doesn’t add up to a row of beans.
But this is the season of goodwill for many, so let’s be more generous. That requires recognising that the success of the Vienna meeting has less to do with arithmetic than with appearance.

Russian oil minister Alexander Novak was spot on in highlighting not that prices are up on the deal but on how much they would have fallen if the meeting had broken up in disarray. “The current market consensus-based price is in a range of $50-55/bl. It is higher by about $20/bl than it might have been should the deal have failed.”

The non-Opec agreement was needed to seal the more important Opec agreement to cut 1.2mn b/d. It allowed Opec as a whole and Saudi Arabia in particular to demonstrate that they are not shouldering the burden of rebalancing alone.

And this was first Opec and non-Opec output deal since 2001. For all its limitations, might it herald future co-operation, whether no more than an extension of the current deal or something more ambitious?