Can the OPEC and Non-OPEC Agreement Alleviate the Oil Market Slump?

The oil market has not been balanced in recent months and there is a significant oversupply in the global crude oil market. Internal competition within OPEC and mutual threats among its members, as well as competition between this organization and external rivals, have placed the oil market in a very shaky position. These problems, given the continued slow growth of the global economy, have made the economies of OPEC member countries and other producers vulnerable. The recent decline in crude oil prices in the international market is evidence of this. Furthermore, prior to the recent agreement between OPEC and non-member countries, forecasts from the International Energy Agency indicated that this oversupply was expected to continue into next year. Non-OPEC oil producers agreed on Saturday, December 11, to reduce their daily production by 600,000 barrels per day to support oil prices, in line with OPEC's reduction of 1.2 million barrels per day. The significance of this agreement lies in the fact that for the first time in 15 years, OPEC member countries have finally reached a consensus on reducing crude oil production after much back-and-forth, and have simultaneously agreed with a significant portion of non-member producers to strengthen the position of crude oil producers by reducing crude oil production and supply in the global market. Thus, it is hoped that with the reduction of 1.2 million barrels per day in OPEC's production and the 600,000 barrels per day reduction from non-OPEC producers, the oversupply in the market will either be eliminated or at least reduced. The market's anticipatory and subsequent reactions to the OPEC and non-OPEC agreement must be considered, as oil prices are influenced by psychological, news, and fundamental factors in the oil market and other financial markets. The anticipatory reaction of the oil market to the OPEC and non-OPEC meeting on the production cut plan led to a nearly one percent increase in oil prices on Friday. However, since the relationship between oil prices and the dollar is often inverse, this increase was later neutralized by the strengthening of the dollar. The oil market will show its subsequent reaction to the recent agreement on the first working day of Monday, which will likely be psychological at first but will later be adjusted by the effects of fundamental market factors. Therefore, fundamental market factors, such as supply and demand and inventory levels in oil-importing countries, will guide the stable price trends in the coming weeks. Oil prices have decreased to about one-third of their peak in 2012, and it is not unlikely that crude oil prices could even fall below $35. The immediate and direct goal of the recent agreement between OPEC and non-OPEC countries is to counter the further decline in oil prices in the global market. Therefore, expectations from this agreement are limited to eliminating the oversupply in the oil market in the short term and next year, provided that OPEC member and non-member countries remain committed to their obligations. The oil market slump in the long term is related to both long-term and short-term economic factors such as global economic growth and the adoption of alternative energies to fossil fuels. Currently, there is no clear outlook for a rapid increase in the rate of economic growth internationally. Furthermore, recent experience over the last half-century shows that the efficiency of fossil fuel use has increased, while alternative energies such as solar, wind, and marine energy are gradually replacing fossil fuels. Therefore, it can be said that the recent oil agreement between OPEC and non-OPEC countries, if successful and sustainable in their commitments, will lead to a reduction in the oversupply in the oil market, but other problems in the oil market will remain. For example, as prices in the oil market rise, the exploitation of unconventional fossil resources or shale oil becomes economical, and its supply to the market will increase. According to the latest World Bank report on the commodity market, the discovery of new energy supply sources, especially shale oil producers, will limit OPEC's ability to control prices. Therefore, it is expected that with oil prices rising above $50 per barrel, inactive drilling rigs for these oil resources will become active again. Additionally, the existence of regional and international conflicts poses a barrier to investment and consequently economic growth. For this reason, it cannot be expected that international economic growth will increase rapidly. Thus, unless unforeseen events occur globally, it seems unlikely that fundamental market factors such as demand will see a significant increase. In conclusion, the oil market slump primarily depends on fundamental economic variables such as the slow growth rate of the global economy, reduced investment, the efficiency of energy resource utilization, and the adoption of alternative energies to fossil fuels. Therefore, it cannot be expected that the recent agreement between OPEC and non-OPEC countries will solve these problems. The main goal of the recent agreement is to reduce the existing oversupply in the market and prevent further declines in oil prices. OPEC member countries and their international partners will only succeed in achieving this goal if they can maintain their commitments through increased trust and social capital among themselves. Increasing trust capital, especially in the oil market, which is defined by imperfect competition, is of great importance. The lack of social capital among crude oil-producing countries means increased competition among these countries, which will be detrimental to all of them.