Saudi Arabia: OPEC reaches tentative deal to cut oil production
September 29, 2016
For the first time in nearly 8 years, the Organization of the Petroleum Exporting Countries (OPEC) reached a preliminary deal on restricting crude supply in order to support prices. The decision, which was taken on the sidelines of an energy conference held on 26–28 September in Algeria, includes a reduction in oil production to a range of 32.5–33.0 million barrels per day (mbpd), down from 33.24 mbpd in August. The OPEC announced the establishment of a committee to discuss individual country allocations, which have yet to be decided, and their implementation. Talks will also be extended to non-OPEC members such as Russia. The final details of the deal will be presented at the 171st ordinary OPEC meeting on 30 November.
The OPEC members decided to take action as the fall in oil prices observed since mid-2014 has led to sharp declines in revenues, deep cuts in investment and massive layoffs in oil-producing countries. This situation has weighed on government budgets and, ultimately, on economic growth.
Beyond the positive consequences for oil prices, the deal proved that Iran and Saudi Arabia were able to commit to a cap despite rising political rivalry. Nevertheless, markets are cautious about whether the tentative accord will become more definitive at the November meeting. There is no agreement about the reintroduction of country quotas or enforcement mechanisms. Moreover, Iran expressed its determination to boost oil production to its pre-sanctions production level of around 4.0 mbpd from August’s production level of 3.65 mbpd, which could derail any agreement as Saudi Arabia will only cooperate if Iran takes part in the production cut.
Despite the tentative agreement among key producing countries, oil prices did not rally significantly as market participants’ skepticism over whether the deal will be enforced led to profit-taking. The OPEC’s oil basket traded at USD 44.6 per barrel on 30 September, a decrease of 1.4% over the same day of the previous month. Oil prices have recovered an astonishing 42.7% since the start of the year and they are up 2.4% on an annual basis.
Oil prices have also been negatively affected by fears that the global oil glut could last longer than expected. According to a report from the International Energy Agency released on 13 September, supply will outpace demand next year.
OPEC pumped 33.24 mbpd in August, slightly down from the 33.26 mbpd extracted in July. According to the latest OPEC Monthly Oil Market Report, August’s decrease in output mainly reflected a fall in production in Libya, Nigeria and, to a lesser extent, in Ecuador and Venezuela. Conversely, Iran and Saudi Arabia recorded significant production gains in the same month. Saudi Arabia produced 10.61 mbpd in July, which was broadly in line with the 10.60 recorded in the previous month.