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Vol. 21, No. 49 Week of December 04, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

OPEC agrees to oil cut

Oil price rises above $50 in response to cartel’s production agreement


Petroleum News

The Organization of the Petroleum Exporting Countries has agreed on a cut in oil production, a move that rapidly sent the price of oil above $50 per barrel. The new agreement, hammered out between the OPEC member countries during an OPEC meeting in Vienna on Nov. 30, sets a new production ceiling of 32.5 million barrels per day, a drop of about 1.2 million bpd. The new quota goes into effect on Jan. 1.

In a statement following the Vienna conference OPEC said that it had reviewed the oil market outlook for the remainder of 2016 and 2017 and that it sees the need to draw down the overhang in oil stocks as a major concern.

“Current market conditions are counterproductive and damaging to both producers and consumers,” OPEC said in a press release announcing its new production agreement. “It threatens the economies of producing nations, hinders critical industry investments, jeopardizes energy security to meet growing world energy demand, and challenges oil market stability as a whole.”

Russia joins in

According to a Nov. 30 report by Russian news agency TASS, Russia, a major oil exporting country that is not a member of OPEC, has also stated its intent to join the production cutting move.

“Russia is ready to join the agreement for stabilization of the situation on oil markets,” said Russian energy Minister Alexander Novak, according to the TASS report. “According to results of our proactive talks with key OPEC and non-OPEC countries that lasted several months, Russia will reduce production by up to 300,000 barrels (per day) in the first half of 2017 in a phased manner within tight deadlines, on the basis or technical opportunities.”

OPEC says that it has reached an understanding with non-OPEC countries, including Russia, that these countries will limit their oil outputs to a combined maximum of 600,000 bpd.

Individual national targets

The various countries in OPEC have each agreed on individual production limits that contribute to the overall 1.2 million barrel OPEC cut. Saudi Arabia, by far the biggest producer, has committed to reduce its daily output upper limit by 486,000 bpd to 10,058,000 bpd. Iraq, the second largest producer, will reduce its daily limit by 210,000 bpd to 4,351,000 bpd. The United Arab Emirates and Kuwait have also agreed to substantial cuts.

The exception is Iran, a major oil producing country that has recently re-entered the world oil market following the lifting of international sanctions. Iran will be allowed to lift its daily production cap by 90,000 bpd to 3,797,000 bpd. And OPEC has not published any production quotas for two of its members: Libya and Nigeria.

Indonesia, a country that had been an OPEC member but is nowadays a net oil importer, has suspended its OPEC membership.

OPEC, a cartel of oil producing nations, sees its mission as coordinating the oil production policies of its member countries, to stabilize oil markets and hence to secure petroleum supplies for consumers, ensure a steady income for producers, and to ensure a fair return on investment for the petroleum industry.

The effectiveness of the new OPEC deal to cut production will presumably depend on the diligence with which the member countries follow through on their cut commitments, and on the extent to which non-OPEC countries cooperate in the production limiting arrangements.

Saudi Arabia

Saudi Arabia, the largest oil exporter, plays a pivotal role in managing the global oil price through adjustments to production quotas. Although the country has traditionally tended to maintain prices at relatively high levels through production constraint, the country changed tactics following the sudden crash in oil prices to below $100 per barrel in 2014. Instead of cutting production to support the oil price, Saudi Arabia maintained its production levels, a move which analysts interpreted as a tactic to maintain market share, in particular given the ascendance of shale oil development in the United States.

In a November interview with the Financial Times, Ali al-Naimi, the now retired Saudi Arabian oil minister who had been a key decision maker in the policy in 2014 to maintain production levels, explained the rationale behind the policy decision. Saudi Arabia had no choice, he said. If the country had cut production, with oil flooding onto the market and non-OPEC countries refusing to cut their production, more non-OPEC production would simply have entered the market. But the resulting fall in price had been greater the Saudi Arabia had anticipated, he commented.

Daniel Yergin, energy expert and vice chairman of IHS Markit, said in September that he expected that OPEC would try to stabilize the oil price at $50 in its November meeting. According to a report in CNBC following the Nov. 30 OPEC agreement, Yergin said that Saudi Arabia needs to sell oil at a reasonable price to maintain the country’s new policy of economic diversification.

“They need a decent oil price, and they need to maintain market share,” he said.

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