OPEC agrees first collective production cut in eight years

Following a sustained period of low oil prices and a series of failed negotiations, the world’s major oil exporters have finally agreed to cut oil production levels. The Organisation of the Petroleum Exporting Countries (OPEC) reached a deal at its meeting Vienna in November to cut production by 1.2mn barrels of oil per day (b/d) to around 32.5mn b/d for six months from the start of January 2017. There is also an option to extend the agreement until the end of 2017. 

With Russia reported to be on board (indicating it will cut production by 300,000 b/d), key non-OPEC members are being leaned on to deliver a 600,000 b/d reduction to complement the 1.2mn b/d cut, says Paul Hickin, Managing Editor, EMEA Oil, S&P Global Platts. 

Both Russia and OPEC have had issues with non-compliance to quotas before, and some speculate that there could be issues again this time.

The International Energy Agency and the US Energy Information Administration have projected oil surpluses in the first half of 2017 at around 900,000 b/d, so if cuts are maintained inventories will be tapped. It will be crucial that Saudi Arabia, which assumes OPEC’s presidency next year, leads by example and enacts its 486,000 b/d cut, says Hickin. 

Oil prices rose above $50/b following the OPEC announcement. Sam Wahab, Director of Oil and Gas Research at Cantor Fitzgerald Europe, commented: ‘Prior to this agreement, the environment of sub $50 oil was likely to persist, but this move sufficiently addresses the supply/demand dynamics, with some 3.5% of supply being cut from January. It means 2017 will likely see prices around the $55–$60/b mark.’ 

Other market analysts were less upbeat. While noting the OPEC deal was ‘significant’, Mike Jakeman, Global Analyst & Commodities Editor, Economist Intelligence Unit, commented: ‘We do not expect the production cut to lead to a transformative increase in prices, for several reasons... Production even at the lower level of 32.5mn b/d would still be a high level – there is no threat of an oil shortage that could see the price zoom back up... If there was a sustained rise in prices, this would be likely to trigger a response from US shale producers, which would in turn push the price down again. We think the lack of a sustained rise in prices will see the deal fall apart within a year.’