On 30th of November 2016 as the world waited, OPEC agreed to cut its own production by 1.2 million barrels per day (mbpd), to 32.5 mbpd. Oil prices immediately rose by 8 percent following the announcement and could rise even further in the short term.
The deal, designed to drain record global oil inventories, overcame disagreements between the group’s three largest producers — Saudi Arabia, Iran and Iraq — and ended a flirtation with free markets that started in 2014. It was also broader than many had expected, extending beyond OPEC. Most strikingly, Russia agreed to unprecedented cuts to its own output.
The impact on the energy world was immediate: benchmark oil prices gained as much as 10 percent in New York and the share prices of energy companies around the globe jumped alongside the currencies of large exporters. Whether this is sustained will depend on how strictly members of the Organization of Petroleum Exporting Countries stick to the terms of the agreement.
According to Jeff Currie, global head of commodities research at Goldman Sachs Group Inc., the main aim of the cuts is “inventory normalization,” Non-OPEC member Russia will cut by as much as 300,000 barrels a day “conditional on its technical abilities,” Energy Minister Alexander Novak announced in Moscow.
Saudi Arabia, which raised oil production to a record this year, will reduce output by 486,000 barrels a day to 10.058 mbpd, the OPEC documents show. The United Arab Emirates and Kuwait will reduce output by 139,000 barrels a day and 131,000 a day, respectively.
The strength of the deal will depend on whether all parties deliver on their commitment. Saudi Arabia and its Gulf allies, the U.A.E. and Kuwait, have traditionally stuck to their cuts, but some others haven’t, particularly when prices are low.
The last two years have been painful for OPEC: The group will earn $341 billion from oil exports this year, according to the U.S. Energy Information Administration. That is down from $753 billion in 2014 before prices crashed, and a record $920 billion in 2012. However, regardless of the price of oil, Saudi Arabia is still committed to implementing the necessary economic changes and diversifications, as outlined in its economic plan: Vision 2030, to ensure less future reliance on oil.
For now the OPEC agreement will ensure a more stable oil market and will help oil prices to slowly recover towards a near-term equilibrium of $50 – $60 a barrel by first quarter of 2017. The group will meet again on 25 May 2017, at which point it intends to extend the cuts by another six months, according to Qatari Energy Minister Mohammed Al Sada.