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Should petrol and diesel be brought under GST? India’s Gas Scenario Unjust enrichment or scam? Old wine in old bottle Will OPEC succeed in increasing price? Why have we failed? ‘Kaliyuga’ of climate change preventable Open up the oil market Little effort to exploit rich reserves OVL records highest ever profit The dooms day of crude oil The great oil subsidy riddle Moily and his magic wand... Does India need a giant integrated PSU oil company?
 
Will OPEC succeed in increasing price?
In 2014 when oil prices were above $90/b, Saudi Arabia decided to try and retain market share than defending higher prices. In three months, oil prices fell below $50/b and by January 2016, it fell below $30/b.

SUDDENLY THE SAUDIS changed their policy and led other thirteen OPEC members to cut production by 1.2 million barrels per day (mbd) in November 2016. It was followed by an agreement with eleven Non-OPEC countries that agreed to reduce their production by another 0.6 mbd. (see Table-1) 

There are not many in the oil industry who believe that oil exporting countries will adhere to their quotas. Historically there are no instances when all OPEC and Non-OPEC have complied with the agreement. 

Stock build up...

Ever since the drop in oil prices, world has been building oil stocks and there is a surplus of about 300 mbd of oil inventories currently. A likely drawdown of stocks of about one million bd can wipe this surplus. In addition, if OPEC and Non-OPEC succeed in reducing oil production in 2017 by 1.7 mbd, then supply and demand will not only balance, there can be even competition to get reduced oil supplies. Thus one can easily come up with a scenario under which oil prices can go high. It is difficult to guess how high it can go. History shows that when supplies are limited, prices can easily exceed $100/b.

Oil pundits explain the reason for crude oil price increase during 2003 to 2008 by pointing out at OPEC surplus of less than 1 to 2.0 mbd. When we look at the OPEC surplus during 2014-16, it is less than 2 mbd. Still oil prices are low. This clearly demonstrates that OPEC surplus though an important factor in determining oil prices, by itself does not influence the oil price movement. Also assessing OPEC surplus capacity is not an objective exercise. For example countries like Libya, Nigeria and Iraq where there are civil unrest it is not easy to estimate their oil production capacities. 

Ever since the development of oil futures market, it is not the physical supply and demand of oil, which has major influence on oil prices, but the paper barrels. Open interest in oil futures during the last three years is more than 1600 mb when daily world oil demand is only around 98 mbd. 

Since it is paper barrels which influence the oil price movement, 2017 oil prices will again be influenced by what oil futures market assess the chances of OPEC and Non-OPEC enforcing the oil production quota. If the assessment is that they will succeed, then oil market can easily reach $100/b. On the other hand, if futures market loses faith in the ability of oil exporters in controlling the production, it can fall below $30/b. 

Make best use of current low price...

If history were to guide us, more than likely oil exporters will fail and oil prices may remain low. However, with the aggressive stand taken by Saudis to go beyond their agreed reduction, odds of OPEC succeeding might have changed from 20 per cent to 60 per cent. Since current OPEC surplus is around 2 mbd, oil prices may easily climb above $70/b this year. Therefore the NDA government should make the best use of the current low oil prices to eliminate indefensible LPG subsidy and liberalise LPG market. Poor could still be helped through direct benefit transfer. The window of opportunity to reduce corruption by eliminating LPG subsidy will not remain open for long. 

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