SAUDI Arabia has pulled it off! With stakes high, the OPEC kingpin had little option. Markets badly needed a lift. The last two years have been painful. As per the US' EIA, OPEC is set to earn only $341 billion from oil exports this year. That's down from $753 billion in 2014, and, a record $920 billion in 2012. Without a deal last Wednesday, crude markets simply would have decimated. Thus with Riyadh haggling, debating, arguing, pushing, steering, squeezing, leveraging and forcing the oil producers, OPEC and non-OPEC alike, an agreement was finally struck - taking off a significant 1.8 million barrels per day (bpd) crude from the markets from January 2017. Indeed, for this tougher than expected deal, the oil Kingdom had to lead from the front, agreeing to absorb the largest hit, an output cut of 486,000 bpd. This resulted in OPEC, as a group, agreeing to reduce its output by 1.2 million bpd - to 32.5 million bpd from the current 33.7 million bpd. And once OPEC had consented to set for itself the much sharper target of 32.5 million bpd, energy diplomacy got into swing, making the non-OPEC producers also to agree to reduce their output by another 600,000 bpd. Indeed in order to achieve that, world's largest crude producer Russia had to be won over. Moscow all along has been insisting on freezing its output, rather than cutting. And this is where energy diplomats were set in motion - making Moscow finally agree to a healthy output cut of 300,000 bpd, making the total cut number - impressive and credible. Iranian position was another stumbling block. Tehran all along has been stressing that it needed to get back to the pre-sanctions level of around 4 million bpd, before contributing to any output cut. This was a sticking point. But as the meeting began on Wednesday, positive signs started to emerge. Before the onset of the behind the door deliberations, Energy Minister Khalid Al-Falih indicated the group was moving "close" to a deal, signaling he was working to bridge a gap with Iran. He also underlined, he expected Russia and other countries outside OPEC to cut about 600,000 bpd of production, once OPEC had agreed to a deal. After the overnight deliberations and private consultations between the groups, the Iranian tone also appeared changed Wednesday morning. Bijan Zanganeh, Iran's oil minister, told reporters all OPEC members were ready to compromise and there was a "framework for a deal". His tone was notably softer, most felt there. The Iraqi insistence to be kept out of any output reduction regimen in view of its ongoing war against IS and the consequent elevated defense related expenses, was also another issue the ministers needed to handle on the day. And so they did, with Iraq finally agreeing to contribute to the overall output cut by reducing its output by 210,000 bpd to 4.351 million bpd. For the first time since the 1990s, Iraq now is within the OPEC output quota gambit. As expected, markets reacted positively to the news. By the weekend, Brent was already on track for its biggest weekly rally since 2009, steadying above $51 a barrel. WTI trends were no different. Would markets hold firm, or it is just a momentary reaction - remains a big question. A lot depends on if the accord is implemented in letter and spirit. There are definite issues. Over the past two years, the fall in oil prices has put a damper on project investment in places like the United States, Canada, and Brazil, because fracking, oil sands and deepwater projects need relatively high prices to make investing worthwhile. That crimp in investment has helped stabilize prices around their current level. But if OPEC successfully throttles back on its output and prices get a boost that could induce some fracking companies in Texas or North Dakota to start drilling again. At that point, supply would rise and prices would fall - again. Jason Bordoff, founding the director of Columbia University's Center on Global Energy Policy was quoted in the press as saying that forecasts vary wildly on how much US oil production could grow, if prices rise to, say $60 per barrel. Some suggest an extra 300,000 bpd, others 900,000 bpd. A lot depends on the "break even" point for shale projects in the United States. During the price crash, many fracking companies managed to slash costs. As per a Reuters report, oil companies in a corner of the prolific Bakken shale play in North Dakota can now pump crude at a price almost as low as that enjoyed by Iran and Iraq. In shale fields from Texas to North Dakota, production costs have roughly halved since 2014, the report underlined. In Dunn County, North Dakota, there are around 2,000 square miles where the cost to produce Bakken shale is $15 a barrel and falling, according to Lynn Helms, head of the state›s Department of Mineral Resources. Dunn County, producing about 200,000 bpd, has cost about the same as Iran, and a little higher than Iraq. The breakeven cost per barrel, on average, to produce Bakken shale at the wellhead has fallen to $29.44 in 2016 from $59.03 in 2014, according to consultancy Rystad Energy. In terms of wellhead prices, Bakken is the most competitive of major US shale plays. Wood Mackenzie said technology advances should further reduce breakeven points. Occidental Petroleum Corp. is enjoying a steady improvement in well productivity and lower drilling and completion costs in the Permian Basin. "Simply put, we can deliver more production with fewer wells," Vicki Hollub, the company›s president and chief executive, told analysts on a recent call. Oil companies are already investing big money to benefit from shale›s resurgence. Tesoro Corp recently snapped up Western Refining Inc in a $4 billion deal. Separately, trading firm Castleton Commodities International LLC bought more than $1 billion in assets from Anadarko Petroleum Corp to increase its stake in East Texas. The steep slide in costs could encourage more US shale output, once OPEC reduces output and prices stabilize. This could be a cause of concern to OPEC. Some analysts are also keeping a keen eye on Russia. Would Moscow stand by its words and reduce output as agreed - some continue to ask? After all, history is not behind Russia, in this regard. Also, there is a considerable concern about a number of OPEC producers not sticking to their output quotas. After all in past some of them were known quota busters. Would it be different this time - remains to be seen? Questions persist. The next few months are going to be interesting and trendsetting in many ways. For the time being, let's keep the fingers crossed.
