Volume 25 Number 10 — October 2016
A publication of the Greater Houston Partnership
A Mushy Bottom — On September 28, the Organization of the Petroleum Exporting Countries (OPEC) announced it had reached a tentative deal to cap production between 32.5 and 33.0 million barrels per day. The agreement would remove 0.5 to 1.0 million barrels from the global market. Commodity traders reacted immediately to the news, boosting the spot price for West Texas Intermediate (WTI) and Brent by $2 per barrel that day. September closed with WTI at $48.24 and Brent at $49.24, nearly double their February lows. OPEC hopes to set formal production quotas before the cartel meets again on November 30 in Vienna. Quotas will be based on each member’s average production during the year. Libya and Nigeria, which have suffered outages due to civil unrest, will receive higher quotas. Saudi Arabia has agreed to let Iran boost its production to levels reached prior to the imposition of economic sanctions in ’06. The oil ministers hope to bring nonmember producers such as Russia into the agreement as well. The decision to limit production marks a reversal of the pump-at-will strategy OPEC adopted in November ’14. What motivated OPEC to reverse course? The oil ministers didn’t offer any explanations, but industry analysts have suggested a variety of reasons. Change in Global GDP and Crude Demand 3.5 Global GDP
5.5
Crude Demand 3.0
5.0
2.5
4.5
2.0
4.0 1.5
3.5
1.0
3.0
% Change, Crude Demand
6.0
% Change, Global GDP
OPEC has grown impatient waiting for demand to catch up with supply. The initial bump from lower prices has evaporated. Growth remains weak and the International Monetary Fund has ratcheted down its forecast several times in recent years. With each adjustment, the International Energy Agency has ratcheted down its forecast for crude demand as well.
0.5
2.5 2.0
0.0 '10
'11
'12
'13
'14
'15
'16
'17
Sources: International Monetary Fund, International Energy Agency
The oil price collapse has wreaked havoc on member finances. In June, The Wall Street Journal reported that OPEC countries ran a combined deficit of $99.6 billion in ’15, compared to a surplus of $238.1 billion in ’14.
October 2016
©2016, Greater Houston Partnership
Page 1