OPEC meeting and the global oversupply of oil

At the end of September, OPEC (Organisation of the Petroleum Exporting Countries) members met in Algiers to discuss an oil output freeze in an attempt to tackle the current global oversupply of oil in the market. It was then agreed that the major oil producing countries were to curtail their production in an attempt to control the output levels, and reduce the glut in the market.

This news came as quite a shock, due to the fact that OPEC meetings over the 2 years previous to this had never ended in an agreement to cut production. Oil prices had been fluctuating between $45/bbl and $49/bbl throughout most of September prior to the meeting. However, after the agreement was made to freeze production, oil prices jumped above the $50/bbl mark, as markets took the news as taking a positive step to reduce the current oversupply.

Following last months’ meeting, Iran made a bid for other major oil producing countries who were not part of OPEC to join them in reducing production too. In the second week of October, President Vladimir Putin announced that Russia would be interested in participating in the freeze on the condition that others would comply also.

In more recent news, oil prices have dipped slightly, towards the $50/bbl mark, as Iraq requested to be exempt from the agreement, in order to deal with the current war on ISIS. This has somewhat diminished hopes of tackling the oversupply in the market, as Iran is recorded to be the second largest oil producer in OPEC. Without Iraq, there is uncertainty that Russia will commit to joining the agreement to cut production levels, and further doubts that the remaining OPEC countries will go ahead with what has been agreed.

OPEC are scheduled to meet this weekend in Vienna to discuss a strategy for implementing the freeze, however nothing will be announced until 30th November. Reports suggest that due to Iraq’s announcements, this weekend’s OPEC meeting will result in a weakened version of the freeze, either by reducing the amount of production to cut, or by freezing at the current levels rather than at reduced levels. This will have little impact on the current global oversupply in the market.

More news on the OPEC meeting will be issued at the end of November, however if the agreement goes ahead as planned, this will be the first cut to production to be implemented in eight years. The impact of oil prices on UK gas and power can be quite significant. In particular, gas prices tend to follow the oil trend fairly closely. If a production freeze is executed, we can expect to see oil and gas prices become much firmer, and steadily increase.

 

Sources: Npower (RWE), National Grid, SSE, Gazprom Energy, Engie, OPEC, EDF Energy