OPEC Agrees to Cut Production

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After eight years of unregulated production amount and two years of oil prices crisis OPEC shows it is not dead and finally will reduce output by about 1.2 million barrels a day by January. Consensus reached on Wednesday in Vienna may reverse the situation of the industry.

Many were sceptic about this agreement. Doubters said that none of OPECs members will likely cut its production due to reducing the market share. That was the bone of contention and that was main reason why it took so long to came to terms. Settlement was not only made between the cartel’s three largest producers: Saudi Arabia, Iran and Iraq, but also smaller producers joined. It is astonishing how broadly agreement is ranging, even Russia declared to cut its production by 300,000 barrels a day.

Energy world was looking forward to this and response was immediate. Crude oil prices have risen sharply, only in New York gained 10%. At the same time, with crude oil prices, also share prices of energy companies around the globe have shot up. However, now important is to fulfill obligations by members of the Organization of Petroleum Exporting Countries, something they haven’t always done in the past.

Despite the fact that an agreement was reached, the situation in group is not that simple. The dominance of Iran will grow at the expense of others due to fact it is allowed to rise its output to 3.8 million barrels a day. It is a victory for the country that has long been imposed sanctions. Saudi Arabia, the largest OPECs producer, will reduce output by over a half of million barrels a day to 10 million barrels a day.

The main factor of coming to terms were earnings of the group: This year total revenue from oil exports will be $341 billion according to the U.S. Energy Information Administration. It is a big drop from the 2014 income before crashing prices, which was $753 billion, and a record $920 billion in 2012.

Unfortunately, market not only depends on OPEC. Along with rising prices and declining oversupply other producers will also want to hold on market. Especially American shale producers are very likely to drill, which would add supply the the global market. The size of cut may seem less significant when compare 1.2 million barrels a day cut to a 96 million barrels a day marketplace. We can only wait until January and see how the market will react.

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