Oil Prices are above 50$ a barrel after OPEC deal

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Agreement to cut production between OPEC members was a suprise in oil sector. It caused price rise of black gold, but will it last for long?
Enthusiasm for the proposed deal finally cooled down and after a while and turned into wary skepticism. Lack of faith in this deal is quiet understandable. Deal is full of exemptions and conditional allowances. Ground of agreement rests on good will of Saudi Arabia. OPEC leader wants to pull the other members behind it in a fight to rescue prices from further stagnation. The cut is also evidence of the changing conditions within Saudi Arabia itself, which after a two-year strategy of maximized production is at a cross-roads, financial stress and general instability.

The goal of the cut is to bring the OPEC production level from 33.24 mln bpd (level at the time of the meeting) to a level between 32.5/33 mln bpd. This agreement is an important sign of changing priorities within Saudi government. There are some politicians in UAE that hope to see their country in other field than oil sector and begin more diversified economy.

The Saudi commitment to cut production is shared by only ten other members of the organization: there are several important exceptions that will, in effect, render the cuts largely symbolic, at least as far as the supply-demand balance is concerned.

Nigeria has been allowed to continue pumping, as it deals with violence in the Niger River Delta. Libya is also exempt, as its oil industry slowly finds its feet amidst civil war. Questions linger over how Iraq, which has enjoyed freedom to pump what it wants since 1991, will be brought back into an OPEC system of production management. Iraq’s energy minister has acted defiantly, arguing that OPEC figures under-estimate Iraq’s current production levels. This indicates that Iraq, in the middle of its on-going struggle with ISIS, will fight tooth and nail for its existing market share, as well as the freedom to continue pumping what it wants. Russia also will not participate in any cuts and there is huge chance that production cut but OPEC members will be replaced by non-OPEC countries.

To sum up these cuts are about moving the market and sending a message of unity and puropse. Even slight cut of 240,000 barrels per day will show us that OPEC is prepared to influence prices. They lead us to political strategy of Saudi Arabia and changing balance of strength in structures of OPEC. After the first rise in Oil price let’s wait for the further effects of this deal.

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