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OPEC agrees to a production cut

OPEC agrees to a production cut

Dec 04, 2016
3 min read
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Last week OPEC defied its doubters when it agreed to its first production cut, of 1.2 million bpd, in eight years with OPEC members in Vienna making good on the promise they made in Algiers back in September.

The impact of the announcement was immediate with the benchmark of oil prices gained as much as 10 per cent and the share prices of many energy companies around the world jumped.

Under the deal, OPEC will reduce output by about 1.2 million bpd by January for six months, which backed up a plan sketched out in Algiers in September to cut its production to 32.5 million barrels. OPEC will meet again on May 25 next year, at which point it could extend the cuts by another six months.

The burden of cutting production is to be shared among the members apart from Indonesia, which put its membership on hold, Libya and Nigeria, which are both exempt, and Iran, which was allowed a small increase to about 3.8 million bpd.

Saudi Arabia will take the biggest hit and will reduce output by 486,000 bpd to 10.058 million a day, an OPEC document showed. Iraq, OPEC’s second-largest producer, agreed to cut by 210,000 barrels a day from October levels. The United Arab Emirates and Kuwait will reduce output by 139,000 barrels a day and 131,000 a day, respectively.

Non-OPEC members also announced plans to cut production by an additional 600,000 bpd, with half of it coming from Russia.

The strength of OPEC's new deal will depend on whether all parties deliver on their commitment to keep to the production cuts as OPEC has a poor history of compliance.

Spencer Welch, director, IHS Energy commented on the deal. “The burden of the cut appears likely to once again fall on Saudi Arabia, UAE and Kuwait. Today’s deal will certainly provide some short term market price boost. But, disagreements persist among OPEC members on how to measure production, so the deal will be hard to police.”

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