OPEC Announces Production Cuts

After months of bickering and infighting, members of the Organization of the Petroleum Exporting Countries (OPEC) have finally reached an agreement to reduce oil production. On Wednesday, the cartel announced plans to reduce its output by about 1.2 million barrels per day (bpd) from recent levels, to 32.5 million bpd. OPEC also said that it expected producers outside the cartel to cut production by 600,000 bpd. OPEC members have said they are targeting prices as high as $55 to $60 a barrel, a level that would boost petroleum-dependent economies badly damaged by two years of prices that were often below $50 a barrel, and would provide some relief for energy companies that have been battered by the price drop. The deal also included the group’s first coordinated action with non-OPEC member Russia in 15 years.

The OPEC cuts were deeper than many analysts had expected, amounting to about 1% of global production. The 14-member group hopes the output cuts will help shrink a supply glut that has been fed in part by the U.S. shale boom, and has depressed oil prices for more than two years. 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 OPEC negotiations were quite difficult, perhaps ever since the beginning of 2016. I want to express enormous gratitude to our president, Vladimir Putin, as he has been directly involved in reaching the solution, [which] is extremely important for our country and for oil producers,” Leonid Fedun, the vice president of Russian energy giant Lukoil, said in an interview with TV channel Rossiya 24.

OPEC produces a third of global oil, or around 33.6 million bpd, and under Wednesday’s deal it would reduce output by around 1.2 million bpd from January 2017. That would take its output to January 2016 levels, when prices fell to over 10-year lows amid ballooning supply. “We do not believe that oil prices can sustainably remain above $55 per barrel, with global production responding first and foremost in the U.S.,” Goldman Sachs said. U.S. crude production has already risen by more than 3 percent this year to 8.7 million bpd, as its drillers have slashed costs in an effort to compete in a lower price environment

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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 that’s sustained will depend on how strictly members of the Organization of Petroleum Exporting Countries stick to the agreement, something they haven’t always done in the past. “This should be a wake-up call for skeptics who have argued the death of OPEC,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd, to Bloomberg. The price of oil has surged by 8% after the 14-nation cartel OPEC agreed to its first cut in production in eight years. U.S. benchmark Brent crude futures were trading at $53.89 per barrel. West Texas Intermediate (WTI) crude futures were at $51.49 a barrel

The member countries were faced with a “very deep” abyss of low oil prices, and that won out over politics, said Daniel Yergin to WSJ, vice chairman of IHS Markit and a longtime oil-market watcher. “OPEC is back in business,” Mr. Yergin said in an interview. “This will rank as one of their historic decisions.” The plans take effect Jan. 1 and last for six months, with the possibility of another six-month extension. Saudi Arabia, the largest producer in the cartel, whose participation was crucial to the outcome, agreed to slash 486,000 barrels a day, or about 40% of the total. The next highest were Iraq at 210,000 and United Arab Emirates at 139,000.