Danske Research Team
Danske Bank A/S
At an extraordinary meeting held in Algeria at the end of September, the OPEC nations agreed to introduce a ceiling on OPEC’s total output of around 32.5-33.0m barrels per day, which would imply a production cut from the current level. In doing so, OPEC has taken a large step towards working as a cartel once again. However, the impact on the oil market and oil prices remain to be seen and OPEC still needs to decide on how to distribute the output cut between the member nations. In this context, word has it that Iran, Libya and Nigeria may be exempt from the agreement, as these countries are currently producing at sub-par capacity. Most recently, Russia also became involved in negotiations and may contribute an independent cut or announce a production ceiling.
If OPEC should reach a final agreement, possibly together with Russia, it would push oil prices up. Indeed, oil prices have already gone up on expectations of an accord. However, we see no reason to fear a surge in crude prices. Firstly, we believe any final deal would cut OPEC production only slightly. Secondly, the agreement could pave the way for an increase in US oil production. Other things being equal, the latter would simply mean that the OPEC deal would move market share from OPEC to the US. We expect oil prices to remain around the USD50/bl mark for the rest of 2016 and to rise to USD58/bl towards the end of 2017.
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