#OPEC - will it or won’t it?

The Organization of Petroleum Exporting Countries (OPEC) is currently at the centre of a fierce “will it, won’t it” debate, writes Martin Banks.

The question is: will it agree a cut in production at its summit on Wednesday?

The oil price is predicted by the International Energy Agency to jump to as much as $60 a barrel if OPEC finalizes a cut to production at its meeting in Vienna this week. Oil is already almost back to $50 per barrel so cuts of, say, nearly 1million barrels per day from their current level of 33.82 million barrels per day could boost prices.

But there is concern that major non-OPEC producers, such as Russia, will not resolve their "simmering disagreement" with the Saudi-led cartel over who should cut production and by how much.

Russian President Vladimir Putin said he sees a high probability that an agreement to curb oil production will be reached in Vienna.

Some traders actually believe nothing concrete will emerge from Wednesday's (30 November) meeting.

What is unquestioned is that current volatility over oil prices is being driven by trader speculation over the OPEC summit.

The Saudis, whose influence in OPEC should not be under estimated but who are slowly trying to wean themselves off their dependence on oil, are the main force behind the push to cut oil output and, in doing so, lift oil prices.

What’s more, the oil market is still coming to grips with a Donald Trump presidency. Trump wants to boost oil production and exports and advance fracking to tap shale reserves.

This could push oil prices downward.

While the picture currently appears rather uncertain it has at least highlighted other related issues, among them the possibility, ironic as it is, that an oil price hike might actually be good for Europe.

That is the conclusion of Goldman Sachs who say the global economy could benefit from higher oil prices.

That assessment, says energy expert Nick Cunningham, may not be obvious, but there is a certain logic to what the investment bank says.

“Higher oil prices lead to a wave of capital that flows into major oil producing countries such as Saudi Arabia. Unable to use all the capital, Saudi Arabia sends the excess savings back into the global financial system,” says Cunningham.

He adds, “Banks then use that capital to lend. Interest rates also fall as the financial markets are more liquid. The end result is lower interest rates, more financial liquidity, higher asset values and ultimately greater consumer confidence. In short, higher oil prices could boost economic growth.”

According to Goldman Sachs, the “integrated financial system” means that savings from oil producing countries finds its way back to consumer countries, where it can stimulate growth.

And, with Saudi Arabia’s ongoing attempts to stimulate jobs and economic growth that is where the EU comes in.

Trade talks between the EU and the Gulf Cooperation Council (GCC) were halted in 2008 with a number of key issues left unresolved, including finding an agreement on customs duties. The GCC argues that it should be given a free hand to set export duties on products leaving the Gulf as it sees fit – a position that has been rejected by EU officials.

But there are growing calls for the FTA talks between the two sides to be resumed.

Several senior political figures, including for EU trade commissioner Peter Mandelson, and Finnish trade minister Lenita Toivakka, support a resumption.

Toivakka said, “We would like to start [negotiations] again. That would be a good thing and would benefit all of us. In Finland, we are strong supporters of free trade. Free trade is very important for countries like Finland and the UAE because we are dependent on foreign trade.”

Saudi Arabia imposes export duties on petrochemical products, which analysts say can be used to influence the oil price. The GCC, comprising Bahrain, Kuwait, Oman, Qatar, the UAE and Saudi Arabia, is the EU’s fifth-largest export market, while Europe is the biggest market for GCC exports, according to EU estimates.

This year, the Gulf Petrochemicals and Chemicals Association wrote to European and GCC trade negotiations, encouraging them to restart talks.

The UK has already stolen a march on this and Riyadh has been courting UK investors scrambling for returns in the post-Brexit environment.

Britain is already one of the country’s biggest economic partners and UK Prime Minister Theresa May has identified Saudi as one of the government’s priority markets abroad. A Free Trade Agreement between London and Riyadh is also being assessed.

But according to a source in the European Commission’s energy directorate there are no immediate plans for the EU to follow suit.

He told this website, “We are of course aware of those arguing for talks to restart but this is not currently on our agenda.”

Whatever the outcome of this week’s summit in Austria, there is no mistaking that the Saudis do seem intent on pushing ahead with their major overhaul of the country’s economy – and that includes efforts to move beyond a petrol-based rentier economy.

It is all part of Vision 2030, an ambitious effort to reshape the economy over the next decade and a half.

The strategy has derided in some quarters but the programme, unveiled earlier this year, calls for massive investment in the desert kingdom’s under developed private sector with economic diversification rather than domination of the oil markets as the blueprint for the future.

The transformation plan identifies 543 initiatives across 24 ministries and government bodies to implement this year alone that will cost Riyadh $72bn.

That one of the world's oil-dependent economies is openly touting its efforts to move beyond a petrol-based economy speaks to how leading oil producers view long-term prospects for oil prices.

For now, though, all eyes are on Vienna and whether OPEC will, as expected, put the brakes on production and, if so, how cuts will be implemented.

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