OPEC Cuts: This Hasn’t Happened Since 2008
For the first time in eight years, OPEC members agreed to cut production by 1.2 million barrels a day to 32.5 million.
As a result, the price of oil soared 8.2% to $48.93 and could push higher to $55 if all goes according to plan.
After weeks of intense disagreements between Iran and the Saudis, OPEC’s biggest producers left their differences at the door.
The Saudis, for instance, are now okay with Iran’s desire to raise production as high as 3.9 million barrels a day.
The deal -- expected to become effective in January 2017 – will initially last for six months initially with the possibility of extensions.
But there may be conditions.
The agreement is also contingent on non-OPEC countries agreeing to cut another 600,000 barrels a day. However, at issue with non-OPEC countries is just how the cuts will be divvied up among the countries.
Russia, for example, has said it will revise its 2017 oil production lower by 200,000 to 300,000 only if a global freeze pact is allowed, leading us to question if the current OPEC deal to cut 1.2 million barrels a day is conditional on non-OPEC participation.
We also have to question the enforceability of such a deal among all OPEC and non-OPEC countries. Analysts doubt that a deal would be well enforced or would even be enough to address the significant supply-demand imbalance that has pressured markets.
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Historically, it’s been difficult to ensure that OPEC members stick to agreed-upon levels.
The other problem is that countries outside of OPEC – which account for 58% of total global output – just added another 800,000 barrels a day in October 2016.
Russia may agree to freeze 200,000 to 300,000, but it would be doing so after increasing production by 500,000 a day.
At this point, though, it’s a wait-and-see situation. But there’s hope.