ECONOMY


OPEC reaches a deal to cut production

Baku, December 2 AZERTAC

Exactly two years after Saudi Arabia coaxed its fellow OPEC members into letting market forces set the oil price, it has performed a nifty half-pirouette. On November 30th it led members of the oil producers’ cartel in a pledge to remove 1.2m barrels a day (b/d) from global oil production, if non-OPEC countries such as Russia chip in with a further 600,000 b/d. That would amount to almost 2% of global production, far more than markets expected. It showed that OPEC is not dead yet.

According to the Economist, the size of the proposed cut, the first since 2008, caused a surge in Brent oil prices to above $50 a barrel. Some speculators think it may mark the beginning of the end of a two-year glut in the world’s oil markets, during which prices have fallen by half and producers such as Venezuela have come close to collapse.

But Saudi Arabia, OPEC’s biggest producer, realised that pragmatism was its best option. Its promised 4.6% cut in production is mirrored by many other OPEC members, though Iran was permitted a token increase as it recovers from nuclear-related sanctions. That may be galling for Saudi Arabia, but it is likely to benefit far more than Iran from the rise in oil prices, if sustained, than it will lose from lopping 486,000 b/d off its total output. It promises to cut to 10.05m b/d, which is not far below its level in the first quarter of 2016.

If oil prices continue to rise, American shale producers will ramp up output, in effect capping the oil price. This may not happen as swiftly as some think. After all, there are suspicions that, to coax Wall Street investment, shale producers have exaggerated their ability to produce low-cost oil. But many of them are still standing, despite OPEC’s best efforts to kill them off. The cartel cannot declare even Pyrrhic victory from the past two years.

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