Crude Oil Rallies as OPEC Agrees to Cut Production

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Critics, who thought that the OPEC meeting yesterday would be a deal to have no deal, were in for a surprise as the 14-nation OPEC announced that it would cut oil production.

Oil prices maintained strong gains from the European session, rising as much as 6% on the day. As news initially broke unofficially, oil prices saw a rather mute reaction, but crude oil futures for January delivery settled the day at $49.44 a barrel, closing 9.28% higher on the day after the official confirmation.

Brent Crude oil for February 2017 closed at $51.84 a barrel by yesterday’s close.

Brent Oil futures (Feb'17)
Brent Oil futures (Feb’17)

“Accordingly, and in line with the ‘Algiers Accord’, the Conference decided to implement a new OPEC-14 production target of 32.5mb/d, in order to accelerate the ongoing drawdown of the stock overhang and bring the oil market rebalancing forward.  The Agreement will be effective from January 1, 2017,” OPEC’s official statement said.

OPEC’s production cut is the first since the 2014 November OPEC meeting where the cartel decided to open the supply taps to flush out the shale industry predominantly in the U.S. Since then oil prices have been steadily declining, falling to a 12-year low below $30 a barrel in February this year.

In early summer, OPEC countries attempted to strike a deal in Doha, Qatar but differences between Iran and Saudi Arabia led to a stalemate, eventually resulting in a steady increase in oil production.

However, this time it was different. As per the initial agreement that was discussed in late September in Algeria, OPEC members stuck to the deal of reducing production by 4.5% or about 1.2 million barrels per day.

Although doubtful on the oil cuts given Saudi – Iran history of disagreeing on production cuts, the writing was evident as Saudi Arabia is more likely to require higher oil prices, especially after threats from U.S. president-elect Donald Trump of reducing oil imports from OPEC and relying on domestic oil production. Weaker oil prices have also started to dent Saudi’s budget as a result.

Details of the November 30, 2016, OPEC Meeting

  • OPEC to curb production by 1.2 mln bpd
  • Iran production to be set at 3.797 mln bpd
  • Saudi to cut production to 10.06 mln bpd
  • Non-OPEC countries to contribute 0.6 mln bpd with 0.4 mln bpd cut from Russia
  • Output deal will be effective in January 2017 and will last for six months, but can be extended
  • Iran, Libya and Nigeria exempt from cuts
  • Indonesia suspended from OPEC on account of being a net importer
  • OPEC to create oversight committee to ensure compliance with the production cuts

Saudi Arabia surprisingly decided to bear the brunt of oil production cuts while Iran is expected to freeze production close to its current levels of 3.797 million barrels per day.

“OPEC has proved to the skeptics that it is not dead. The move will speed up market rebalancing and erosion of the global oil glut,” Amrita Sen, an oil analyst from Energy Aspects said.

Earlier in the week, Saudi played tough noting that it would not attend the pre-OPEC meeting as there was no consensus. This was followed up by Russia releasing a statement that it would not cut production if OPEC failed to reach an agreement. However, Saudi Arabia managed to pull the meeting through. “It’s a good day for the oil market; it’s a good day for the oil industry. [The] deal is not only what we wanted, but what the market wanted.” Saudi Arabian Energy Minister Khalid Al-Falih said following the agreement.

Non-OPEC countries are expected to lower production by 0.6 million barrels per day with OPEC expecting to see Russia lower production by 0.4 million. A Russian ministry source was quoted as saying “a bit excessive” on the quota for Russia.

There are still questions on implementation and if the OPEC nations will adhere to the limits. In October it is reported that OPEC production touched 33.6 million barrels per day according to secondary sources.

But many experts are hopeful that oil prices will continue to trend higher. Goldman Sachs for one expects WTI crude oil to average around $50 a barrel by the end of 2017.

Saudi Arabia and Russia are expected to meet within 10 days to discuss the non-OPEC commitment to the deal, although Russia has already indicated that it is “on board” with the production cuts.

The next OPEC meeting is scheduled for May 25th, 2017 in Vienna.

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