The Organisation of the Petroleum Exporting Countries (Opec) “has come out intact from the Intensive Care Unit ...”. This surely is the precise description of Opec’s decision to resume its historical role in ensuring the stability of oil prices and after the agreement reached last week in Vienna by which it will cut production to 32.5 million barrels a day from 33.7 mbd.

Many experts, especially in the West, had been forecasting the collapse of Opec, even describing it as the “former organisation”. They said Opec no longer has an organisational role in the global oil markets due to fragility arising from internal disputes and frequent failures to put a new production cap on each member’s output in recent years. There was also speculation about the withdrawal of some members.

The latest agreement, however, shows that Opec had experienced serious — but not devastating — problems, and that it is getting back on its feet stronger and resuming its lead role in deciding oil prices. Opec’s re-emergence was associated with some fresh developments in the balance of powers among oil economies, an outcome that had to happen so that Opec could restore the balance in the oil markets.

The bottom-line here is that there are key influencers outside of Opec with whom member-states need to cooperate in any arrangement to set price levels, especially Russia, the largest oil producing country besides Saudi Arabia.

Doing so represents a key guarantee for the success of any agreement made to determine production levels and this is what happened during the recent visit of the Russian minister of energy to Riyadh last month, where both countries agreed to cut production and thus lay the foundation for the Opec agreement.

Russian pressures

The Iranian and Iraqi rejection of cutting production had stood as a barrier in the path of such a deal. However, Russian pressures on both forced them to join in, but without any guarantee to their full commitment to production quotas due to multiple reasons.

Iran’s waging of senseless and sectarian wars in the region requires increasing its oil revenues by boosting production, while in Iraq there is no strong government that can practically control production levels. Yet, the Russian pressure remains the only hope, especially as the mullah regime in Tehran needs more than ever to coordinate with Russia on a number of regional issues.

There are other obstacles but of less importance such as the Indonesia’s withdrawal (the second time after its recent rejoining) after objecting to cut production. Indonesia’s share of production is relatively low and declining due to limited reserves.

Opec’s latest agreement has raised prices by 20 per cent at the beginning of the week with Brent hitting $55 (Dh202) a barrel. Rest assured, this raises possibilities of speculative activity, which could run counter to achieving the desired for outcomes from the agreement.

Fluctuations

At the end of the day, the deal outcomes will be a positive because speculations are a fundamental part of commodity price fluctuations. It is an ongoing process in the market with or without the Opec agreement and that makes it necessary to deal with it as a matter of fact.

In the longer term, we completely agree with the conclusion reached by the International Energy Agency last Thursday. Its director-general noted during an energy conference that the global oil market is going to experience a period of fluctuations after Opec‘s latest decision.

There will be the outflow of US shale oil, which will increase if prices exceed $60 a barrel, thus creating pressing challenges Opec will need to address in cooperation with non-member oil producers.

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.