It’s been a rough couple of years to be an oil cartel. The Organization of Petroleum Exporting Countries, or OPEC, has endured a global supply glut, low prices, declining revenue, and rising drama over failed oil production agreements that led many experts to write preemptive obituaries for the group. But on Wednesday, OPEC surprised the world by announcing that for the first time in eight years it would cut back oil production to nudge up crude prices.
The deal, to start in January, would see OPEC member countries trim their combined oil output by about 1.1 million barrels a day, to 32.5 million barrels of oil a day, according to a statement released after the group’s ministerial meeting on Wednesday.
It’s a long-delayed response to a flood of oil that has outstripped global demand for the stuff and kept prices less than half of what they were in 2014. It’s also an indication that OPEC, and especially Saudi Arabia, the biggest oil producer in the group, is willing to again play a role as market balancer — potentially bringing some longer-term stability back to the global oil market.
Riyadh, who championed OPEC’s drill-till-you-drop approach two years ago, will take the brunt of the pain, agreeing to an output cut of nearly 500,000 barrels a day from record-high levels of production of 10.673 million barrels a day. Iraq, the cartel’s second-biggest producer, will cut 210,000 barrels a day. In all, OPEC members — famous for their fractiousness and an inability to share the pain — appear to have agreed to trim production by about 5 percent each. Even Russia, which isn’t a member of OPEC but whose breakneck oil production has contributed to the glut, agreed to gradually rein in output by 300,000 barrels a day.
In answer, crude oil prices leapt upward by over 10 percent to top $50 a barrel for the first time in a month. While that’s great news for cash-strapped petro states like Iraq and Venezuela — and an early Christmas gift for the U.S. oil patch — it’s a little less cheery for consumers, who will have to pay a bit more at the pump.
Under OPEC’s surprise agreement, one country caught a break: Iran will be allowed to increase production by about 90,000 barrels a day while everyone else cuts back. Tehran has been adamant that it must regain market share that it lost while facing U.S. and Western sanctions that halved its oil exports from 2012 through last year.
OPEC’s first agreed cut since 2008 — when oil prices collapsed late in the year after hitting record levels in the summer — comes when the group’s members are reeling. OPEC is on track to earn just $341 billion in oil exports in 2016, down from a record $920 billion in 2012. That has hammered oil-dependent states, making it tougher for Iraq to fight Islamic State, for example, or Venezuela to craft a functioning economy. Even wealthy states, like Saudi Arabia, have felt the pinch, burning through about $180 billion of currency reserves and slashing public-sector salaries in the last two years.
OPEC’s rediscovery of discipline could be enough to help rebalance the market next year and push up oil prices — if, that is, members actually adhere to it, and if rejuvenated U.S. oil production doesn’t spoil the party before it gets started.
OPEC members don’t have a great record of actually sticking to agreements they make. And political feuds between members, notably Saudi Arabia and Iran, had a habit of boiling over into OPEC meetings and torpedoing agreements in the past.
“We believe much uncertainty remains with respect to global oil supply in 2017,” said Kevin Book, managing director at ClearView Energy Partners. That’s primarily due to OPEC’s “poor track record of adhering to production quotas and ongoing supply disruptions around the globe,” he added. Another OPEC cut might be needed in the second half of next year, he said.
Meanwhile, U.S. oil companies, who need higher crude prices than their Middle Eastern counterparts, have just been waiting for an uptick to drill even more. And thanks to a couple years of belt-tightening, U.S. drillers have gotten great at cutting costs and squeezing out productivity gains, making it easier to thrive in a low-price environment.
Renewed U.S. production on the back of rising prices could simply end up prolonging the glut, push prices back down, and end up costing OPEC billions.
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