What happens after the new OPEC+ yields agreement?

OPECRussia and other major oil producers may have decided to extend their agreement to reduce yields and shrink oil oversupply, but key issues remain in the sector.

Saudi Arabia, the most influential member of OPEC, insisted on a nine-month extension of the agreement that would make the cartel and its allies – like Russia – reduce yields throughout 2018. Russia wanted more flexibility and shorter deadlines of the contract. The largest oil producer in the world is not a member of OPEC but has gained influence over recent months as the Saudis have been looking for a partner to curtail yields at the same time as the cartel without stealing the market share of any member of the organization.

After several weeks of Saudi Arabia insisting on a nine-month extension of the agreement to reduce yields, oil market observers believe that any shorter decision could lead to a fall in oil prices.

In the last weeks, prices have reached their highest levels in two weeks after they have been optimistic about strong demand for black gold, global economic recovery, geopolitical tensions in the Middle East, and declining OPEC production. A shady shadow over Thursday’s event is thrown by American shale makers whose technologies allow faster growth and production cuts relative to oil prices.

The American oil industry flourished when prices were constantly at or above 100 USD per barrel. This led to an oversupply of crude oil and eventually shattered the market in 2014. Now US manufacturers are ready to reap the rising prices again.

The OPEC meeting marks a dynamic year for the oil industry. Crude oil prices rose in early 2017 due to the hopes that a reduction in the production capacity of the cartel would shrink the enormous global oversupply. Then prices fell because of the pessimism of OPEC’s efforts, but again returned to sustainable growth in the summer because of shrinking Saudi exports, supply collapse and geopolitical tensions.

Big oil companies are increasingly optimistic and report profits after years of loss. Royal Dutch Shell PLC said this week that it would start paying out the full amount of dividends in cash – a sign that the company could generate enough money to cover the payments. BP PLC and Statoil AS Discuss the same.

This week, prices fell on suspicion of an agreement. Analysts argue that long-term yield reductions are needed to help OPEC achieve its goal of returning the price to average historical levels over the past five years.

Prices may fall on Thursday even with an extended contraction period, WSJ commented. The paper recalls that on May 25 the cartel did what the market was expecting – increased the production contraction period by nine months to March 2018. However, that day the price dropped by 5%.