The recent OPEC oil output-cut deal “will come to symbolize the passing of one of the world’s most powerful cartels,” the Financial Times predicts.
OPEC forged the deal after Saudi Arabia accepted "a big hit" on its production and dropped its demand on arch-rival Iran to slash output. Non-OPEC Russia will also join output reductions for the first time in 15 years to help the Organization of the Petroleum Exporting Countries prop up oil prices. As a result, the U.S. stock market soared to record highs and oil prices surged.
But one respected economic voice is far from being impressed.
“After 50 years in control of the oil price, OPEC has submitted to the economic power of a much-changed global market. The deal represents the recognition of their own impotence by a group of countries that once held unchallenged power,” writes Nick Butler, a visiting professor and chair of the Kings Policy Institute, London.
“This is not a deal capable of lifting prices to the level of $60 or $70 a barrel that is supposed to be OPEC’s target,” Butler wrote for the FT.
He pointed out other weaknesses in the strategy of the deal.
“There is a surge of production coming in the next 12 months from new fields in countries outside Opec, such as Brazil, Canada and Kazakhstan. It is perfectly possible that total global production — from Opec and non-Opec states combined — will be higher next year than in 2016,” the FT reported.
“Consider the US shale business, which has every incentive to use the price rises to maintain and increase production. Contrary to the prophets of doom, the industry has been remarkably resilient in the past two years. There has been no collapse. Costs have been cut radically," Butler wrote.
"Some companies have shut down production but they will use every opportunity to bring it back on. And the advances made in technology and productivity will spread across the world, further increasing output,” the FT reported.
In the oil patch itself Friday, prices rallied for their best week in at least five years, steadying above $51 a barrel, following OPEC's decision to cut crude output to rein in a global glut that has weighed on prices for more than two years, Reuters reported.
After the deal was announced on Wednesday, the market focused on the implementation and impact of OPEC's first output cuts since 2008, to be joined by Russia and possibly other non-OPEC producers.
Crude prices were pressured by data showing oil output in Russia rose in November to a post-Soviet high and Moscow's plan to use its record November oil production as its baseline when it cuts output.
With cuts being implemented next year only against end-2016 levels, analysts said there was still a possibility that oversupply, which has halved oil prices since 2014, remains a factor next year.
"Global, and especially U.S., crude oil inventories are currently at extremely high levels after two years of massive oversupply," Societe Generale analysts said.
"While the OPEC agreement is very significant and will result in some moderate global stockdraws next year, it is likely to take more than one year for crude inventory levels to return to more normal levels."
However, Butler is far from alone in his criticism of OPEC.
Veteran financial guru Larry Kudlow, who served as the Donald Trump campaign's senior economic adviser, recently told Newsmax TV that the cartel's glory days have passed.
“I don't care what they (OPEC) do," Kudlow told Steve Malzberg on "America Talks Live." "Our oil and fracking or natural gas makes the United States the most important oil producer and if the price goes up, you'll see all that fracking come back online, supply will increase, the prices will be relatively stable,” he said.
“I don't care about OPEC," Kudlow, a Newsmax Finance Insider and CNBC senior contributor, said, calling the Organization of the Petroleum Exporting Countries oil cartel "yesterday's news."
“I say the swing producer is the United States. OPEC is dead,” said Kudlow — host of "The Larry Kudlow Show" and author of "JFK and the Reagan Revolution: A Secret History of American Prosperity," written with Brian Domitrovic and published by Portfolio.
(Newsmax wire services contributed to this report).
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