Oil prices surge as OPEC reaches consensus to freeze output

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After three days of talks in Algeria, leaders of the Organization of the Petroleum Exporting Countries agreed to limit oil production for the first time in eight years.

Following a three-day conference in Algeria, the Organization of the Petroleum Exporting Countries came to an agreement on Sept. 28 to reduce oil production.

This is the first time since 2008 that the oil cartel agreed to lower its output. When the OPEC committee decided to reduce its output back in 2008, Saudi Arabia’s leaders walked out of an ongoing session, which resulted in a production dispute. Later that day, the Saudis released a statement that they would not observe the OPEC decision.

In the past two years, oil prices steeply decreased due to a “global glut” after major players like Saudi Arabia, which depends on oil for its revenue, refused to lower output. Furthermore, due to increasing investments in new technologies like horizontal drilling, U.S. producers exceeded expectations by producing massive amounts of tight oil, which was long thought to be too expensive to produce. The impact of massive oversupply shifted the prices from $100 per barrel in 2014 to $26 per barrel earlier this year.

Currently, Saudi Arabia is the largest oil producer among OPEC members, with an output of about 10.7 million barrels per day. On the other hand, Iran’s production has been stagnant at 3.7 million barrels per day, which is close to pre-sanction levels.

According to the recent agreement, the production range would be lowered from 33.4 million barrels per day to a figure between 32.5 and 33 million barrels per day. The production is set to be decreased by around 700,000 barrels per day, with Saudi Arabia decreasing its production by up to 350,000 barrels per day.

The agreement took place after Saudi Arabia softened its stance on oil output, a move that the experts did not anticipate due to previous disagreements between Saudi Arabia and Iran. The move to cut output contradicts Saudi Arabia’s previous stance and strategies. However, due to the fact that Saudi crude oil is the cheapest to produce, the low cost and high production does not seem to bother the country’s officials. In the short run, the low costs could put high-cost producers out of business and, as a result of the restricted oil supply, prices will be forced to go up.

After the agreement, oil prices temporarily rose by 5 percent, though the price of crude oil opened slightly lower once again on Sept. 29. Brent crude rose 2 percent on Thursday to just over $49.64 a barrel and has gained almost 8 percent since the beginning of the rally.

Additionally, the Financial Times Stock Exchange 100 index rose 1 percent to a six-week high of 6,919 points, with oil and commodities companies contributing the most.

“The world may be heading for a period of ‘goldilocks’ oil prices: low enough to provide a sizeable boost to spending on other goods and services, but high enough to keep the major producers afloat,” Julian Jessop, chief global economist at Capital Economics, said in a conversation with CNNMoney. “Even if oil prices recover further to around $60 next year, as we expect, consumers should still be better off.”

Even though this move was welcomed by the markets, it may have little impact in the long term. There is already an excess supply of oil in the markets, so cutting production is set to have a negligible effect. A report recently published by the International Energy Agency shows that there is enough production to last well into next year. Additionally, there was no pact made with non-OPEC oil producers like Russia, which implies that they could keep pumping oil without constraints.

The degree of uncertainty as to how much oil each country should produce mounts additional pressure on OPEC. Experts hope to get the answer during the next meeting, which is set to take place in Vienna on Nov. 30.

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