Since September, OPEC has been frantically trying to organise its first production cut deal since the financial crisis in order to combat the continuing crude oil downturn in a hope that the embattled industry can once more regain its economic prowess.

Saudi Arabia, under the influence of Prince Mohammed bin Salmam al-Saud, has been a key driver of the production cut proposals from the outset, as the Prince in his capacity of Chair of the Council for Economic and Development affairs looks to shift the Gulf State’s economic reliance on the production of the black stuff into a new age of economic self-sufficiency. This culminated in the country’s willingness to compromise with other members to seal the deal, made even more poignant with its side-dealing with non-OPEC Russia in order to force the others’ hands.

But for all of the firsts that OPEC has managed to pull out of the hat, beginning with the initial landmark agreement in Algiers back in September, there are still hurdles on the path for the price of Crude Oil to regain the $60+ handle, let alone in reaching the dizzying heights of $100 per barrel that Brent was trading at only two years ago.

The first and most immediate concern for industry analysts is the continued increasing output of OPEC members before the production cut quotas are implemented on January 1. Today the International Energy Agency reported that the group’s total production output in November was 34.2 million barrels/day (bpd), an increase of 300,000 bpd from October and a new record high. This could cast some doubt on the feasibility of the production cut agreed to curtail the global oversupply and subsequently lead to a crude oil price rally. Let’s not forget, the deal is only to be implemented for 6 months from January 1st. Might this ramping up of production make the deal completely irrelevant with respect to its overall targets?

Second, the cartel is notorious in its history of disregarding production cut quotas and carrying on pumping out the product regardless. Goldman Sachs notes that in the 17 production cut deals the cartel has reached since 1982, only 60% of stated reduction commitments have actually been adhered to by members. This is a worrying figure for analysts already sceptical of OPEC’s willingness to actively cut production, especially given the aforementioned increase in output over November by key members alongside the figure manipulation involved in producing the deal (by suspending Indonesia’s membership of the group) and that fact that the size of the non-OPEC production cut fell short of the cartel’s hopes. All-in-all, it does not make for confidence-inspiring reading.

Finally, let’s not forget the US shale industry, the very same group of producers OPEC tried to drown out with its ‘pump at will’ order given by Saudi Arabia in 2014. The move prompted a tactical change from the group of stateside producers, reducing costs in order to stay afloat. This has led to the shale industry companies becoming some of the most cost effective in the world, in doing so handing the moniker of swing producer to the US. And with Donald Trump’s election pledges to revive the industry coupled with the appointment of industry heavyweight Rex Tillerson as his Secretary of State, could US shale become a greater market mover than OPEC?

Might this even mean that OPEC’s decades long stranglehold on the crude oil marketplace be ceded to a collaborative US-Russian crude oil superpower during Trump’s presidency?

That is something much harder to predict. But in the mean time, all eyes will be on Saudi Arabia and OPEC to see there can be one last surprise pulled out of its 2016 bag of tricks.

Henry Croft, Research Analyst, 13 December