Why It Matters

Opec cuts may have little effect

It was what some sceptics called a desperate move to keep oil prices from collapsing further after vast oversupply and the global economic slowdown left the energy sector reeling.

For a day, the market responded: Oil prices, shares and petro-currencies like the ringgit rallied after Opec's surprise consensus to cut production for the first time in eight years.

The deal by the Organisation of Petroleum Exporting Countries (Opec) would ideally put a floor under prices as the cartel produces more than 40 per cent of the world's supply, so coordinated output cuts could have an immediate impact. But the euphoria soon fizzled out because of the existing glut and the potential for more output from Iran, Libya and Nigeria, as well as from US shale players.

Doubts over whether Opec's proposed cuts are deep enough to make a dent, and uncertainty over whether its members can agree on production quotas also capped the rally. A committee will propose by the next meeting, on Nov 30, how the cuts could be carried out. This could mean that the production cuts - if members agree - would be implemented only next year. Further, the lack of credibility and accountability among some Opec members may undermine the proposed cuts.

Indeed, the surprise Opec consensus came as low oil prices - once seen as a boon - threaten to push the global economy into a tailspin. That's partly because the global economy relies far more today on oil- and commodities-rich emerging countries, which account for about 40 per cent of global gross domestic product. These countries' economies have slowed and many are even contracting.

So, while the consensus to reduce output by about one million barrels of oil a day is seen by most as being too small a cut, it shows Opec is willing to resume its role of propping up prices, which could change the dynamics of the energy sector.

Unless oil rebounds further and global growth picks up, it is unlikely Singapore's battered oil and gas sector will stage a full recovery. Whether the Nov 30 meeting will be a game-changer remains to be seen.

A version of this article appeared in the print edition of The Straits Times on October 03, 2016, with the headline 'Opec cuts may have little effect'. Print Edition | Subscribe