OPEC member countries cut oil output for first time in 8 years

In a tentative agreement, the Organization of the Petroleum Exporting Countries has decided to cut oil production by 1.2 million barrels per day in an attempt to raise crude prices. The deal comes at a crucial time for OPEC members, who have been steadily increasing production over the last two years and are now reaching their maximum capacity.

The crux of the negotiations hinged on Iran bargaining for exemption as the country continues to recover from economic sanctions. Iran’s OPEC governor Hossein Kazempour Ardebili insisted on expanding production to near pre-sanction levels of 4 million barrels per day, according to CNNMoney. Saudi Arabia, a long-time geopolitical adversary of Iran and the cartel’s largest supplier, is now expected to endure the biggest slash to production of the 13 member nations.

Libya and Nigeria also pleaded to be spared from the agreement due to diminished supplies resulting from domestic conflicts. Iraq cited a need to fund the fight against Islamic State as its reason for exemption, according to Bloomberg.

Indonesia, which had rejoined OPEC in January after becoming a net oil importer, suspended its membership again after failing to meet the cartel’s production cuts. With OPEC’s only East Asian member out of the picture, Iran will set its production cap to 3.79 million barrels per day, which is still 123,000 less than what the country reported to OPEC in its October meeting in Algiers.

In an interview with Oil & Gas 360, Art Hogan, the director of research and chief market strategist at Wunderlich, a full-service investment firm, stated, “Saudi Arabia will probably shoulder the bulk of the burden, but the rest of OPEC will be producing at levels similar to where they are now, except for maybe Iraq. But if there’s cheating, I suspect that it’s going to come from non-OPEC countries that say they’re complying and are just along for the ride.”

Before agreeing to the deal, Saudi Arabia sought the cooperation of non-OPEC oil producers such as Russia and Canada, but the International Energy Agency projects an increase in output by the most influential non-OPEC members, according to CNBC . Though Russia agreed to cut production by 300,000 barrels a day, the government’s interwoven relationship with the country’s major oil companies would make potential cuts intolerable. Nonetheless, OPEC believes that it can secure an additional 600,000 barrels per day of cuts from its non-OPEC partners.

Markets reacted positively to the news as the price of Brent crude oil soared 4 percent, reaching $53 per barrel the next day. Crude dipped as low as $28 per barrel in January as an oil glut suppressed prices, hurting suppliers but benefiting consumers at the pump.

Despite the spike, speculators remain skeptical of certain OPEC members and their ability to honor the terms. Prices dropped as a result of lingering doubts surrounding the fragile agreement. Both Russia and OPEC announced record production and U.S. shale oil producers threatened to flood the market.

Increases in U.S. offshore drilling in the Gulf of Mexico is set to hit a record high in 2017, according to the U.S. Energy Information Administration. This enthusiasm for drilling helped create a global oversupply of oil and caused the sharp decline in its value per barrel.

President-elect Donald Trump  is expected to deregulate the oil industry and encourage higher output, potentially negating the effects of OPEC’s deal. U.S. drillers currently have the capacity to double their production, according to Continental Resources CEO Harold Hamm. Tapping into their supply now would make crude prices plunge once more.

Following the OPEC agreement, the U.S. Senate unanimously voted to extend the Iran Sanctions Act for another decade. This move will further ensure Iran’s compliance with the recent international nuclear accord, which was set last year. Iranian President Hassan Rouhani, who has been under fire by many of his opponents in Iran since his government negotiated the deal, described the extension as a “violation” of the current nuclear agreement.

The sanctions, which were first set in 1996, have largely targeted Iran’s banking, energy and military sectors. These sanctions have forced the country to work with the United States and other major countries to establish deals such as the nuclear accord.

With a new measure set to take place, the United States will have the right to re-impose the sanctions if Iran fails to follow its obligations. Many of the sanctions were lifted earlier this year when the United Nations verified that Iran was conforming to the terms of the agreement.

Under the new OPEC deal, Saudi Arabia, the world’s largest oil producer, will cut output by 486,000 barrels per day to 10.058 million a day. Iraq, OPEC’s second largest producer, will slash production by 210,000 barrels per day from October levels.