OPEC deal sends crude oil prices soaring

December 04, 2016
Cartel can rise above geopolitical differ­ences

London - The Organisation of the Pe­troleum Exporting Coun­tries (OPEC) shocked analysts and naysayers by agreeing to its first pro­duction cut in eight years, sending crude oil prices soaring in the pro­cess.
The overall deal calls for a 3.5% reduction in production, which equates to 32.5 million barrels a day, starting in January, with Saudi Arabia, Iraq, Kuwait and the United Arab Emirates facing the biggest cuts in production.
The OPEC deal proves the cartel can rise above geopolitical differ­ences to reach a compromise and reaffirmed its position as the glob­al energy sector’s most powerful body.
The production cut agreement was reached despite wars in Yemen and Syria, which involved Saudi Arabia, the UAE and Kuwait sup­porting opposite sides to Russia, Iran and Iraq.
Ahead of the historic OPEC meet­ing in Vienna, Saudi Energy Min­ister Khalid al-Falih said the king­dom was ready to accept “a big hit” in production to see the deal go through.
“I think it is a good day for the oil markets; it is a good day for the industry and… it should be a good day for the global economy. I think it will be a boost to global economic growth,” Falih said after the deal was reached.
Although Saudi Arabia is taking the biggest hit in terms of cuts, the deal represents a victory for the kingdom, which took a hard-line stance and negotiated for months to get OPEC member Iraq to cut production and-OPEC member Russia to reduce output.
The motivations for Saudi Arabia, the world’s largest oil producer, to compromise for the sake of higher crude oil prices are plentiful, with its goal of diversifying its economy away from the energy sector be­ing the chief one. The kingdom’s ambitious Vision 2030 programme requires a combination of major government spending and austerity measures.
The price of crude oil — about $45 a barrel before the OPEC meeting — jumped to more than $50 a bar­rel after the cartel’s announcement, with observers seeing the price fluctuating between $55-$60 a bar­rel in the next year.
How long OPEC’s production cuts will last is open to speculation, as any cut by the cartel will be offset by increased US production, par­ticularly in the shale oil industry, which was a main reason OPEC in­creased production levels during the last two years.