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A well-timed commitment to maintaining oil cuts

This could keep galvanising a market that had lost much of its sheen since mid-2014

Gulf News

Last week, the world witnessed a great development as Opec announced the extension of the oil cut agreement until end 2018 during its meeting. And what makes it more important is the joining of some key non-Opec producers in the agreement, including Russia, which committed itself to a reduction of 300,000 barrels per day.

Thanks to the earlier cuts, oil prices have surged significantly to settle at over $60 per barrel, which does support the economic and financial conditions in oil-producing countries. They are expected to experience further growth and especially in the GCC countries, regardless of some reports issued to disseminate pessimism and without relying on data and analysis.

The commitment to the output cuts has led to significant outcomes such as the withdrawal of a significant portion of surplus stocks from the international markets. The decline in stocks have been by up to a half in a number of consuming regions.

It has also left a meaningful impact on the markets and speculators, boosting prices to levels not seen in two years and thus forming price parities in line with the budget balancing requirements of a number of oil producing countries. And significantly reduced the annual deficits in the rest.

This means surmounting many challenges that came on the heels of the price collapse three years ago. Despite this, the restoring of the previous development momentum in oil-producing countries needs some time. But the positives have begun to flow and will continue at a faster clip in 2018, backed by an acceptable price for oil in general.

This is conditioned by the commitment to output cuts agreed to by Opec and Non-opec countries, despite the chance for increased production in countries not included in the agreement. The total estimated surge will be around 800,000 barrels a day in some countries, including the US where shale production is projected to increase.

Global demand is likely enough to swell by 1.5 million barrel a day, which will absorb the anticipated production increase as well as any other surge that may result from breaches made by some countries to the reduction pact. Its impact will be limited based on the experience this year.

Yet, it is important to bear in mind that prices will not experience major jumps, such as those which occurred over the past decade. They will witness some fluctuations, ranging between $55-$65 during 2018.

Thus, the expected prices will provide oil producers and exporters flexibility to improve their economic conditions and the re-implement projects postponed following the deterioration in prices three years ago A change in the geopolitical situation can never be ruled out, especially in the Gulf and the turbulent Middle East, which can severely affect supply and demand balance in the markets as well as the non-stop speculative trading. However, the commitment to the output cuts will certainly curb the implications, which means more stability in the oil markets.

As was the case this year, the cut extension may lead to further depletions in global stocks, resulting in a rise of demand and prices. It may even exceed $65 per barrel, especially post next summer.

This will keep the general indicators in the oil market in positive territory, provided Opec and non-Opec members commit fully to reduce production. This also means a strong return of Opec’s influence in the oil market after losing some of that in recent years.

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