OPEC finally reaches an agreement on oil output
AP Photo/ Sidali Djarboub
Main page Economics, Oil

After months of uncertainty and heavy criticism, the biggest oil cartel confirmed its intentions to cut oil production volumes in the member-countries and ease the crude glut.

For the first time since 2008, a 14-member cartel has reached a deal to curtail oil production aimed at supporting the struggling oil market and plummeting prices. During today's negotiations, three main OPEC producers, Saudi Arabia, Iraq and Iran, have managed to resolve the conflict around the countries' individual situations that previously put the deal in danger.

According to OPEC President Mohammed Bin Saleh Al-Sada, OPEC agreed to cut the output by 1.2 million barrels per day to 32.5 million starting from January 2017. The OPEC countries have distributed the individual amounts, with Iran getting a permission to freeze its production to a close to current level of 3.797 million barrels a day, considering its special case. Shortly after the initial confirmation of the deal was leaked, Brent crude (NYMEX: XBR/USD) jumped 8% to above $50 per barrel, reaching 5-week high.

"With the cooperation and understanding of all member companies, we have been able to reach an agreement. This agreement comes from a sense of responsibility for Opec member companies, and for non-Opec member countries, and the health and wellbeing of the world economy," Bin Saleh Al-Sada said during the press conference, as reported by the Guardian.

OPEC delegates promised to hold a press conference earlier today but it was constantly delayed and rescheduled, adding uncertainty around the details of the agreement. The latest news from Vienna suggest that Indonesia was possibly suspended from the cartel. Considering that the country produces about 750,000 barrels per day, not including the country's production volume in the OPEC figures significantly affects the deal.

"While the deal is undeniably impressive, there are still some questions that need to be answered at the press conference. Reports of Indonesia being suspended from the cartel could probe the effectiveness of the production cut, as Indonesia continues to produce 750,000 barrels per day but this will not be included in the OPEC figures. In the short term, the good feel effect could encourage WTI bulls to send crude prices towards $50," an expert Lukman Otunuga told the Telegraph.

Before the meeting, Saudi Energy Minister Khalid al-Falih said that OPEC wouldn't go above 32.5 million barrel and he hoped that other non-OPEC producers like Russia would contribute at least 0.6 million barrels per day, reports the Telegraph. OPEC has an approximate 40% market share at the moment, meaning that the long-awaited production cut could be enough to ease the economic pain associated with low oil prices for such countries as Venezuela and Libya.

Another important factor, add the experts, is that OPEC has proven its credibility to the market participants, as many criticized the group for postponing the agreement and inability to deal with internal issues.

“OPEC has proved to the sceptics that it is not dead. The move will speed up market rebalancing and erosion of the global oil glut,” an expert Amrita Sen told Reuters.

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