OPEC deal to cut oil production and stabilise prices gets Fitch approval

1 Dec 16

Ratings agency Fitch has applauded oil cartel OPEC’s deal to cut production for the first time since the financial crisis as a big step towards stabilising depressed prices, but only if producers can stick to their word.

The group, consisting of the world’s biggest oil producers, is set to cut supply by 1.2 million barrels daily starting in January, while non-OPEC members will also reduce production by 600,000 barrels per a day.

OPEC has been trying to negotiate a cut in production after a glut in the market helped drive a collapse in prices over the past two years, resulting in a substantial loss to members’ oil-reliant economies and government accounts.

Gulf states like Saudi Arabia have gone from being able to fund lavish public spending to running record, billion-dollar deficits, while other oil-rich countries like Venezuela have fallen into economic crisis.

No country had previously been prepared to shoulder the burden of cuts to production, while nations like Iran argued they should not have to take a cut at all as production was already low due to sanctions.

Saudi Arabia has now announced it will shave 500,000 barrels off its daily production, accounting for a substantial portion of the overall reduction.

Meanwhile, Indonesia has agreed to suspend its membership from OPEC because it could not cut output as a net importer.

Of the non-OPEC members involved, Russia has unveiled plans to reduce production by 300,000 barrels per day.

But Fitch questioned the commitment of all parties to the deal, whether or not they are OPEC members, to cooperate fully.

It noted that significant risks remain that OPEC will produce above quota, “as has happened in the past”, while the willingness of others like Russia is uncertain.

The deal currently only applies for six months, after which there is no guarantee OPEC members will reach a consensus to extend it.

These factors, as well as the numerous others that influence prices, mean Fitch expects prices to “flat line” in 2017, although the deal makes any further decrease unlikely. The recovery is likely to be slower and start taking effect in the longer term, the ratings agency said.

For oil-exporting nations in the Middle East and North Africa, the challenge in balancing the books is likely to continue, Fitch continued. Any small increase will still be well below the price needed for such countries to break even fiscally.

Prospects for the region as a whole are weak too, Fitch warned, setting MENA’s overall outlook as “negative”. Even oil-importing countries like Egypt, Lebanon and Tunisia, which can benefit from low prices, face “considerable challenges”, it said.

A number of those countries have turned to the lender of last resort, the International Monetary Fund, and it was announced this week that Turkey and Qatar had deposited $100m and $1.2bn in Tunisia’s accounts to support the country’s ailing economy.

OPEC will hold talks with non-OPEC oil producers later this month, while the group will meet again in May 2017 to assess the progress of the deal. 

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