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Global Energy Advisory December 2nd, 2016

Politics, Geopolitics & Conflict

The biggest news of the week, of course, is that OPEC reached an agreement to cut its output by over a million barrels per day, to a target level of 32.5 million bpd in a bid to support the rebalancing of international oil markets. The cut will take effect at the start of 2017 and will be in place for six months, under supervision from a monitoring committee comprised of OPEC oil ministers. Russia will join the effort, having pledged to reduce its output gradually over the six months by some 300,000 bpd. This will effectively mean delaying plans for production expansion rather than an actual cut.

The OPEC deal can be regarded as an indication of the shift in the balance of power in the Middle East because Saudi Arabia, the group’s unofficial leader and largest producer, was forced to make the biggest concession, at the same time yielding to Iran’s insistence to continue pumping at current rates, which are close to 4 million bpd. Saudi Arabia tried the peaceful way and then it resorted to threats, saying it could further increase production but Iran – and Iraq, for that matter – held their ground.

Despite the good news, which immediately boosted international crude benchmarks, skepticism remains rife, with some observers noting that a production cut does not equal an export cut, so OPEC, which has been amassing crude, could continue to export at current rates with a view to maintaining market share, effectively curbing the upward potential of oil prices. It’s worth noting that the post-announcement jump in Brent and WTI was nowhere near the $55 a barrel forecast by some analysts. In fact, the two main benchmarks did not even get to $53 a barrel before slipping back down to $50 and below.

One thing seems to be clear, though. Up until now Saudi Arabia has been able to lead OPEC in any direction it wants, but with a budget deficit the size of which has never been seen before in the desert kingdom, and with Iran back in the game, it might find itself following rather than leading. Also, the situation could deepen the political tension between the Middle East’s archrivals with unclear consequences. Throw a new U.S. president into the mix, and the uncertainty is palpable.

Deals, Mergers & Acquisitions

• Greece has failed to sell its gas grid operator DESFA to Azerbaijan’s state oil company SOCAR. The deal fell through after the prospective…




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