D efying sceptics, OPEC this week agreed to its first oil production cut in eight years, leading to soaring oil prices. Internal squabbles mainly between Saudi Arabia and Iran and Iraq had led many analysts to predict a difficult meeting after two years of falling oil prices. In what has been seen as a surprise move, non-member Russia agreed to unprecedented production cuts.
The deal stipulates a 1.2 million barrels per day cut in production starting from January 2017, thus fulfilling a plan first sketched out in Algiers to push production to 32.5 million barrels in order to address the glut in the market. Swing producer Saudi Arabia agreed to the lion’s share of cuts, lowering output by almost half a million barrels a day.
In a sign seen by some analysts as Iran’s increasing power in the cartel, Tehran was allowed to raise production to more than regional rival Saudi Arabia originally proposed. Iran has long argued it should have the right to increase output to compensate for lost income due to Western sanctions. Neighbouring Iraq, which was initially resisting pressure by Riyadh to curtail production, in the end agreed to lower output as well.
On the news of the deal, oil prices rose by as much as 10% in the early hours of trading in New York. “This should be a wake-up call for sceptics who have argued the death of OPEC,” Amrita Sen, chief oil analyst at Energy Aspects Ltd., told Bloomberg. “Economics trumped politics, at least for the interim,” Justin Dargin, a leading Middle East energy expert at Oxford University, told The World Weekly.
OPEC producers have felt the pinch of the crash in oil prices. While the bloc earned around $753 billion in 2014, the US Energy Information Administration estimates export revenues could fall to around $341 billion this year. Its outlook for next year is more positive, projecting an increase by more than $85 billion.
But doubts about the agreement remain. For starters, the deal depends on non-OPEC members such as Russia, which could change its stance, according to analysts. Talks with non-members are scheduled for next week.
Mr. Dargin said the planned reductions “may not be enough... to comprehensively reduce the global oil glut”, citing a potential offset by several countries’ storage facilities and increased oil production in North America.
The organisation also has a track record of not adhering to its own agreements with some members having gone rogue in the past. A repetition could derail the planned impact on oil prices. Amidst all the celebration, it is too early to tell whether OPEC really has turned its fortunes around for good.