In what is considered to be an exceptional move, at last OPEC has given in to mounting pressure from low oil prices. The Organization of Petroleum Exporting Countries has agreed to cap/cut output – the first-ever deal in eight years. Before the still-informal deal, analysts had been betting on oil plunging to $40 or lower. Right after the deal, oil prices surged about 5 percent.
OPEC officials have said that the group of oil-producing nations would trim output by about 700,000 barrels per day, a cut of about two percent. The oil cartel has agreed to restrict any production increases, and target production in the range of 32.5-33.0 Mbps. The move came from an informal meeting in Algiers where the cartel’s decision to support prices may have stemmed from economic Saudi Arabia’s depleting reserves and widening fiscal and current account deficit.
The formal deal is set to be signed in November 2016, keeping the uncertainty element still alive; Analysts around the world have serious qualms about the sketchy deal; some have even called the deal nonsense and that Saudis, Iranians, and other OPEC members to continue pumping for keep hold of their market share. Also, amid tepid demand and slow global economic growth, OPEC might be competing for a smaller pie of oil revenue.
If Saudi Arabia and other OPEC club members to keep their word in limiting the oil supply, the market would move towards a new equilibrium. Crude oil is undoubtedly a key market influencer; a significant increase in prices (if it occurs) would have repercussions on the domestic level as well.
First, a rise in crude oil prices will be rejoiced by the oil and gas exploration and production sector that has remained subdued in FY16 and a greater part of FY15. Any positive development in favor of the deal is likely to invigorate the earnings of the sector.
Second, while higher crude oil prices are a yes for the E&P sector, the downstream sector particularly the oil marketing companies might see a cut in volumetric growth due and a restriction in petroleum demand due to rising fuel prices and increasing circular debt.
When remittances are slowing down, and FDI is not reviving, the increase in imported cost will put BoP stability under threat. Higher imports of petroleum products would lead to worsening balance of payment situation. And higher imports and pressure on the rupee will also eventually impact inflation and chances of a reversal in interest rates.
Published: September 30, 2016.
