Oil prices jump as OPEC agrees production cut deal

December 6, 2016

It has been more than two years since crude oil prices began dropping from approximately $105 per barrel to as low as $27 per barrel which was seen at the beginning of this year. The crash played havoc with the global economy and massively reduced revenues from large oil producers such as Saudi Arabia.

It appears that this time crude oil producers decided to do something about the ultra low prices which are primarily the result of over production. During the Organisation of Petroleum Exporting Countries (OPEC) meeting on Wednesday, the members decided to reduce their daily production by 1.2 million barrels per day. Their decision was an effort to increase demand and therefore global crude oil prices by reducing supply levels.

Daily production by OPEC members reaches 33.6 million barrels each day and so the implementation of Wednesday’s deal means that the daily production will be reduced to 32.4 million barrels per day. The meeting’s agreement to reduce output was far from straightforward. Two of the OPEC members, Iran and Iraq, were recently planning to increase their production levels as they emerge from sanctions and war conflicts respectively.

Following the July 2014 oil price crash, OPEC has not done much to address the situation. During that year Saudi Arabia refused to reduce production levels in the hope that the low prices would make it cost inefficient for a large number of U.S. fracking units to continue producing. It should be noted that the large expansion of fracking in the U.S. was a main reason for the price decrease in the first place. However, since then, total U.S. production have decreased significantly from 9.5 million barrels per day to 8.5 million barrels per day due to the price fall.

After news from the OPEC meeting, the price of crude oil on Wednesday increased dramatically by 8.6% to $49.17 per barrel. The increase continued for the rest of the week by an additional 5.1%. On a weekly basis, OIL/USD increased by an overall 14.1% and reached $51.67 per barrel at the end of Friday’s trading session.

Although last week’s deal moved crude oil prices upwards, it is still uncertain whether they will continue their upwards trend. OPEC agreed to cut oil production, but it’s not clear whether non–OPEC producers will continue with similar reductions. As for the OPEC members, it remains to be seen whether they will stick to the deal or whether some will attempt to produce more than what was agreed to last week in Vienna’s meeting. Equally important is how the United States will react. During the past months many fracking units have paused production due to the low prices and higher cost. But if crude oil prices continue moving upwards, those fracking units might resume production which would lead towards the reduction of prices again.




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