OPEC deal could mean loss of influence in global oil markets

OPEC countries are close to clinching a deal to limit oil output, despite their differences. If a deal is reached, it will be OPEC’s first production cut in eight years.

At the meeting in Vienna, key members of OPEC expressed renewed optimism as compromises were reportedly being made.

Disagreements between its three biggest producers – Saudi Arabia, Iran and Iraq – over how much each country should share the burden of reducing output to its lowest since 2008 has been a been a stumbling block. A big reduction by any country would result in greater loss in revenue.

Iraq, for example, has been pressing for higher output limits, saying it needs more money to fight the Daesh militant group.

The 14 country oil cartel, which accounts for a third of global oil production, made a preliminary agreement in Algiers in September to cap output at around 32.5-33 million barrels per day (bpd) versus the current 33.64 million bpd to prop up oil prices, which have halved since mid-2014.

If oil prices are set to go up, as is predicted, much “leaner and meaner” US shale will pose a greater threat to OPEC.

Improvements in technology have enabled shale companies in the US to reduce their breakeven price, which has reportedly placed them in a position to be able to compete with OPEC countries.

US shale had been decimated by the low oil price because of shale’s higher extraction and production costs. However, in places like Texas, the production cost is now the same as what it costs Iran to extract oil.

If this trend continues, OPEC’s ability to control global oil supply and control prices will be greatly diminished.