Opec Plus: an agreement to save the oil market

Opec Plus meeting: a compromise has been reached

After days of difficult negotiations, the meeting between the Opec cartel and Russia has ended with an important agreement that seems to have found the approval of all participants. The topic of discussion at the traditional end-of-year summit was cuts in crude oil production, a long-standing issue that has been the subject of debate for some time now, both within and outside the international organisation.  

As mentioned above, the meeting was called to find an agreement between countries such as Russia, Kazakhstan – countries that are not part of Opec, the Organisation of Petroleum Exporting Countries – and Iran – which, on the contrary, is a member state -, which would like to be able to go back to increasing the production of crude oil and those states led by Saudi Arabia that instead believe it is more prudent to continue with the last months’ cut policy, so as to avoid a new devaluation of the price of the black gold as it happened in the first half of 2020.

It took almost a week of negotiations to get everyone to agree, but in the end, albeit a few days later than expected, a decision was taken: the increase in production will be limited to 500,000 barrels per day for all producers. In addition, it was decided that the situation should be constantly monitored by means of monthly reports on the performance of the sector, so as to be able to evaluate further measures, both positive and negative. 

In this way, an attempt has been made to meet the concerns of those who did not agree with the decisions made during the previous Opec Plus meeting in the spring, when it was announced that production would be cut by 2 million barrels. 

Thanks to this compromise, producer countries whose economies are suffering partly because of the impact of the pandemic should be able to recover. The agreement was also appreciated by the stock market, as shown by the immediate rise in WTI prices following the announcement, which have never been higher since March.

What to expect from 2021

The strategy that has been put in place by Opec Plus will rebalance the trend in the crude oil market, even though experts expect this to be effective only by the end of the year. This intervention will prevent a repeat of what happened in 2020 with the collapse in prices and demand, and will avoid a new market surplus.

By reducing the size of the cuts, but not removing the restrictions altogether, it will be possible to avoid a new market surplus that would certainly have put a brake on the rise in fuel prices. Of course, it is necessary to consider that the agreement reached in recent days cannot last forever and that the danger of a new crisis is very real.