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OPEC Cuts Unlikely to Have Long-Term Impact on Oil Markets

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OPEC Cuts Unlikely to Have Long-Term Impact on Oil Markets
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Preston Caldwell: In the last month, it has become increasingly clear that OPEC has been successful in achieving the production cuts that it announced in November of last year. Nevertheless, as we reiterated in our note immediately following that event, there are plenty of reasons to doubt that these cuts will have a material long-term impact on oil markets.

First, looking at the last 20 years of OPEC production cuts, we can see that none of them have lasted longer than a year. To be sure, OPEC has been capable of short-term supply cuts, especially in response to equally short-term recession-induced demand shortfalls, as in 2009. But the organization has been incapable of sustaining long-term production cuts in order to counterbalance long-term supply/demand shifts, as was the case for the decade of weak oil prices following the mid-1980s oil price crash.

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Preston Caldwell does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.