OPEC is Divided
The first variable that underpins the likelihood of an oil production cut deal, is the relationship between OPEC members. The organization is far from being a monolith. In fact, it is probably one of the most politically divided international organizations. Additionally, OPEC members have a tradition of violating production quotas they agree to. Nevertheless, the Saudi-Iranian divide is probably the most prominent variable that can hold OPEC from reaching a production cut deal, despite historical implementation troubles.
Adding Oil Barrels
The second variable that analysts must take into account, is production capacity from previously battered member countries. Libya, Nigeria and Iraq have improved oil production conditions. This means that those countries produced below their potential for years, and are now getting rid of those disruptions, effectively adding barrels to an over-supplied market. Along with Iran’s push to recover market share due to the lifting of sanctions earlier during 2016, this variable can preclude OPEC from reaching a deal. There is no doubt that each one of these 4 countries is interested in recovering market share and they are all arguing that production cuts should come from other countries.
Non-OPEC Oil Production
Even if OPEC can reach an agreement to cut production and actually implements it, non-OPEC producers can quickly take advantage of rising oil prices to increase supply. This means that any potential OPEC deal would work only temporarily. US shale, along with unconventional oil from Canada and vast oil reserves in Russia can be unleashed quickly. This would depress oil prices once again, while effectively forcing OPEC members out of markets they previously controlled.
More Nails in OPEC’s Coffin
This is precisely the reason why OPEC reached out to its Russian counterparts. Russia on its part is reluctant to adhere to any production cut deal. Apart from Russia’s production potential, there is also the issue of alternative energy technology. Although it may face its own obstacles on its way to becoming a mass-produced alternative, clean-tech is a clear and present threat to OPEC’s price aspirations. Companies that invested in EV vehicles, like Tesla and GM could easily take away a huge portion of the market for oil.
All this augurs a bleak future for OPEC members. The odds of striking a deal are low, but the odds of any potential implementation of a deal are even lower. OPEC’s lack of complete control over oil markets lowers the odds of oil price recovery even further, and clean-tech can become a serious threat to the whole oil economy in the coming years.
