Don’t be quick to celebrate

yesterday the price of Brent oil rose by more than nine percent, or more than US$4 per barrel. Oil had held onto gains of around seven percent for most of the European afternoon.

This news has been interpreted by some in this country as a signal that the good days will be back shortly. While we all hope for better days soon, where sentiment in the energy sector will be bullish and we can see government revenues from the energy sector returning to previous levels, we need to pause and first take a look at the deal.

We also need to examine certain relevant information sets that have material bearing on the ability of OPEC to have a sustained upward impact on prices and for us to be able to benefit from this deal.

What are the details of the deal? Saudi Arabia, which raised oil production to a record this year, will reduce output by 486,000 barrels a day to 10.058 million a day. Iraq, OPEC’s second- largest producer, agreed to cut by 210,000 barrels a day from October levels. Iran, which has negotiated for an increase and not a quota, was allowed to raise output to about 3.8 million barrels a day.

For the deal to work it is important that non-OPEC countries such as Russia participate with cuts of their own. Any cut between 300,000 and 600,000 bpd would amount to almost two percent of global production, far more than markets expected. If it works, the OPEC agreement could push oil above US$60 a barrel within weeks. However, we must note that speculators were mostly betting on an OPEC failure. But why is this? If oil prices continue to rise, its sustainability hinges on the speed at which American shale producers will ramp up output, in effect capping the oil price and on Donald Trump’s dream of oil self-reliance.

Many of these shale producers are still standing, despite OPEC’s best efforts to kill them off, and they are very eager to dish out some much-desired retaliation against OPEC.

Any continuation of an oil price rally, however, also depends on non-OPEC members such as Russia reliably committing to cut output at a meeting on December 9. But it must be remembered that it is impossible to monitor Russia’s pledge to cut any production, because much of its production moves by pipeline.

It could say one thing and do something else.

Trinidad and Tobago’s ability to get an increase in revenues from the oil sector has little to do now with price changes, but far more with changes in the fiscal regime for the energy sector, which came into effect in 2014, and, among other concessions, allowed for the write-off of 100 percent of capital expenditure on exploration in the first year.

This has seen a dramatic fall in revenues from the energy sector.

It is only when these changes in the fiscal regime expire would there be some relief for the country.

The worst case is that an OPEC agreement to limit oil production for the first time in nearly a decade does more to erase a market surplus than support higher prices. If that is the case then we in this country can expect no relief from the efforts of OPEC.