The Organisation of Petroleum Exporting Countries (Opec) has agreed on a package of supply reduction which was outlined several months ago. The intention is to choke off supply and therefore bolster the oil price – so it’s good news for them and bleak news for consumers if the deal sticks.
The reduction in Opec output would be the first seen for 8 years and is planned to start next month. Capacity will be reduced by 1.2 million barrels per day with a further reduction of 600000 barrels per day coming from non-members, including Russia. The deal is significantly more ambitious than the 700000 barrel per day reduction which was agreed to back in September. The cartel represents approximately 30% of global crude production.
Speaking of the deal, Mohammed Bin Saleh Al-Sada, Opec’s president said: "This agreement comes from a sense of responsibility from Opec member countries and non-Opec member countries for the general well-being and health of the world economy".
Saudi Arabia will trim production back by half-a-million barrels per day to 10.6 million barrels, but Iran which was released from sanctions on sales of its oil output as a consequence of the deal reached with the international community to curb its nuclear ambitions, will be allowed to increase output.
The price of crude has been bolstered by the news with Brent Crude rising by 10% to $51.94 per barrel. However, some analysts are cautious about the chances of the reduction in output being sustained as it requires the continued goodwill not only of Opec’s querulous members, but, notably that of Russia which may not have the same economic drivers and goals as the cartel over the longer term.
Saudi Arabia, in particular, had been relaxed about a weak oil price as it believed this could choke off shale oil production from North America. Whilst output from shale did decline and the exploitation of more marginal reserves was mothballed, shale oil production has continued despite the economic squeeze on crude prices.