Oil needs fair deal to fix glut

The oil industry has been suffering its deepest downturn in over two decades and needs a shot at revival. It is, therefore, imperative that the next meeting of the Organisation of the Petroleum Exporting Countries (Opec) in Vienna on November 30 reaches a deal to limit supply as was proposed in September. Oil is trading at near $50 level in anticipation of an agreement. A cut of 4 to 4.5 per cent for all members would work best and bring the current output down by 1.2 million barrels per day. This will be good to prop up the oil price to above $50 in the coming months. However, the success of such an agreement hinges on Iran and Iraq, who are currently not showing any inclination of slowing down production to regain their market shares which fell due to economic sanctions and conflict respectively. Iran, which was recently freed from sanctions after the nuclear deal with the West, is seeking exceptions, and so is Iraq.

Persistent low oil prices haven’t helped bolster the economic engines of the world. On the contrary, low oil prices have complicated the conduct of monetary policies and also fuelled unanchored inflation expectations. As per analysts estimates, oil prices at current levels could also create disturbances in corporate and sovereign defaults, and feed into jittery financial markets. The possibility of such negative feedback loops makes demand support by the global community all the more urgent. Opec’s proposals of limiting the group’s output to a collective 32.5 million to 33 million barrels a day is a good start. However, despite the jawboning there hasn’t been a consensus yet. Opec has also sought Russian support to stabilise the oil market but the Kremlin, on its part favours a freeze at current levels rather than a cut in production. It is in everyone’s interest to come to an agreement and address the oversupply in the global market as oil prices languish at more than 50 per cent below their mid-2014 levels. In the absence of any pact, the current glut will increase to about 70,000 bpd in the first three months of next year, which will not bode well for any stakeholder and the world economy.

Khaleej Times

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