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Oil prices jump as OPEC agrees production cut deal
It has been more than two years since crude oil prices began dropping from approximately $105 per barrel to as low as $27 per barrel seen at the beginning of this year. The crash played havoc with the global economy and massively reduced revenues from large oil producers such as Saudi Arabia.
It appears that this time crude oil producers decided to do something about the ultra low prices which are primarily a result of the oil extraction in excess of global demand. During the Organisation of Petroleum Exporting Countries (OPEC) meeting on Wednesday, held in Austria, the members decided to reduce their daily production by 1.2 million barrels per day. Their decision was an effort to increase demand and therefore global crude oil prices by reducing supply levels.
Daily production by OPEC members reaches 33.6 million barrels each day and so the implementation of Wednesday’s deal means that the daily production will be reduced to 32.4 million barrels per day. The meeting’s agreement to reduce output was far from straightforward. Two of the OPEC members, Iran and Iraq, were recently planning to increase their production levels as they emerge from sanctions and war conflicts respectively. But the organisation’s largest producer, Saudi Arabia, until last week failed to convince the two nations to reach an agreement.
Following the July 2014 oil price crash, OPEC has not done much to address the situation. During that year Saudi Arabia refused to reduce production levels in hope that the low prices would make it cost inefficient for a large number of U.S. fracking units to continue producing. It should be noted that the large expansion of fracking in the U.S. was a main reason for the price decrease in the first place. However, since then, total U.S. production decreased significantly from 9.5 million barrels per day to 8.5 million barrels per day due to the price reduction.
After news from the OPEC meeting, the price of crude oil on Wednesday increased dramatically by 8.6% to $49.17 per barrel. The increase continued until the end of the week by an additional 5.1%. On a weekly basis, OIL/USD increased by an overall 14.1% and reached $51.67 per barrel at the end of Friday’s trading session.
Although last week’s deal moved crude oil prices upwards, it is still uncertain whether they will continue their upwards trend. OPEC agreed to cut oil production, but it’s not clear whether non–OPEC producers will continue with similar reductions. As for the OPEC members, it remains to be seen whether they will stick to the deal or whether some will attempt to produce more than agreed last week in Vienna’s meeting. Equally important is how the United States will react, during the past months many fracking units have paused producing due to the low prices and therefore high cost. But in case crude oil prices continue moving upwards, those fracking units might resume working which would work towards the reduction of prices.
https://www.ft.com/content/8442fc28-b7e7-11e6-ba85-95d1533d9a62
http://www.cnbc.com/2016/12/02/opec-deal-how-the-cartel-may-move-oil-markets.html
http://www.reuters.com/article/us-global-oil-idUSKBN13R02L
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