After two years, the Organisation of the Petroleum Exporting Countries (OPEC) made on Wednesday a historic decision to avoid cutting output and allow prices to fall, the group said that it agreed to cut production by 1.2 million barrels a day from the current 33.6 million barrels
Questions remain about the long-term impact of the deal and the ability to enforce the quotas, the agreement was hailed by investors.
by
N. Peter Kramer
It said to expect that producers from outside the cartel will join with additional cuts totalling 600.000 barrels a day. Russia is already on board for a cut of 300.000 barrels a day.
The OPEC cut alone represents about 1% of the global production, which will reduce a gut of supply that has depressed oil prices for more than two years. After the decision, US oil prices surged 9.3% to just under $50, hitting a one-month high.
Saudi Arabia, OPEC’s most powerful member and de facto its leader, pushed hard this time for a broad agreement that would include OPEC- and non-OPEC-members, and agreed on the highest burden of cuts at 486.000 barrels a day.
Questions remain about the long-term impact of the deal and the ability to enforce the quotas, the agreement was hailed by investors. But, ‘OPEC is back in business’, oil-market watchers said. ‘This will rank as one of their historic decisions. Without this they would have been looking at the abyss. And the abyss is very deep. Interest won over politics’.
OPEC members are targeting now prices up to $60 a barrel; a level widely viewed as a sweet spot for oil prices, since it is high enough for more oil producers, among them Russia, to profit. Economists say it is still low enough to support economic growth. As less oil is produced, that will help to draw down the record amount of oil stored in tanks around the world that are weighing on prices.
The fresh deal strikes a fresh path for the 56-years old oil cartel, whose members have struggled to find common ground. But risks remain. The OPEC agreement will be re-evaluated at its next regular meeting in six months.