Alive OPEC: the cartel for the first time since 2008 agreed on production cuts

After nine weeks of intensive negotiations, the three largest oil producing member of OPEC — Saudi Arabia, Iraq and Iran settled their differences about the levels in which each country agreed to limit their production. This first trade to reduce the total production that the cartel managed to conclude in 2008. Themselves advice about freezing with varying degrees of success took almost a year for the first time this initiative was suggested at the last meeting in Doha February 15 meeting of Russian energy Minister Alexander Novak and his colleagues from Saudi Arabia, Qatar and Venezuela. The parameters of the deal given in the published on the website of the OPEC agreement.

The agreement will enter into force on 1 January 2017. It is designed for six months, after which it may be extended depending on market conditions. Aggregate production in the organization will be reduced to 32.5 million barrels. a day. This is a reduction of 1.2 million barrels. per day compared to average production in October as planned at the previous meeting in Algiers in late September. Another 600 thousand barrels. per day extraction of previously agreed to reduce the country, not part of the group. Consultation with them is scheduled for December 9, Bloomberg reported, citing one of the delegates.

Saudi Arabia will limit oil production at the level of 10.06 million barrels. a day (against of 10.54 million barrels. a day in October), Iran — at the level of 3.79 million barrels. day, Iraq — at the level of 4.35 million barrels. a day. At the meeting, the Ministers approved the suspension of membership in the organization of Indonesia. Her quota will be distributed among other members of the group, reported TV channel Al-Arabiya, citing a source at the petroleum club. Libya and Nigeria have been released from production cuts. Previously this feature was caused by the difficult economic situation of these countries. OPEC will establish a Committee for monitoring the implementation of the terms of the transaction. It will include Venezuela, Kuwait and Algeria, two countries that are not members of OPEC.

“[His decision] OPEC sent a signal to the skeptics that spoke about the death of OPEC, Bloomberg cites the words of Amrita sen, chief oil analyst of the British research company Energy Aspects. The group wants to reduce the amount of oil reserves”. “The parameters of the agreement convenient for all parties involved — led the Agency review Jeff Curry, head of the direction “investigation of commodity markets,” Goldman Sachs Group. — All stakeholders should consider it a success.”

Effect on prices

OPEC’s decision has triggered a rally in the oil market. Benchmark Brent jumped on Wednesday by nearly 8%, from $46,38 up to $50.02 per bbl, WTI rose by 8.6%, from $45,23 to $49,12 per barrel. But OPEC’s decision made too late to have a lasting effect on prices, says the head of commodity strategy at ING Bank Hamza Kan. “In the next six days, the immediate reaction may be continued growth of prices, because the numbers are quite positive and promise a sharper decline than expected, — quotes Bloomberg words of the Khan. When the initial euphoria will subside, there will come a time shale producers of the US, which will start to increase production because this decision essentially means that for them Christmas came 26 days before the deadline”. The fact that OPEC refrained from cutting production for so long, played into the hands of American manufacturers, who were able to reduce costs and adapt to produce oil at $40 per barrel. So OPEC’s decision was too little and taken too late, which allows American manufacturers to fill a niche, concluded Khan.

The implications for the market

Statement of significant OPEC production cuts, to 32.5 million barrels. per day, may stimulate the growth of prices of oil to $5 or higher in the following days, predicted Morgan Stanley analysts led by Adam Longson, in its review of 28 November. The effect will be even stronger if supported by strong statements from countries outside OPEC.

It is unlikely that the agreement will completely eliminate the glut of oil on the market — according to calculations by the group, to balance demand and supply total OPEC production should not exceed 31.9 million barrels. a day in the first half of 2017, however, it opens up the opportunity to join the transaction of other countries, primarily Russia, the largest oil producer outside of OPEC.

Russia’s Reaction

On Wednesday, a source familiar with the Russian position, told Bloomberg that Moscow is ready to take a more flexible stance on the restriction of production, if OPEC reaches an internal agreement on production cuts. After it was announced about the agreement, Minister of energy of Russia Alexander Novak welcomed the outcome of the meeting, calling them “a very important step for the global oil industry.”

“Russia as a responsible participant in the market who are ready to join the agreement on stabilization of the situation on the oil markets. At the end of intensive negotiations that lasted the last few months with key countries within and outside OPEC, Russia will gradually reduce production in the first half of 2017, in the amount up to 300 thousand Barr. a day in a short time, on the basis of their technical capabilities,” said Novak.

He noted that the total contribution of the parties to the agreement in efforts to stabilize the market “substantially exceeds” the level of overproduction of oil in the world and allows you to speed up the process of rebalancing. “We are optimistic about the development of the agreements, and we believe today’s agreement historically important event,” stated the Minister.

“In my opinion, this is absolutely the right solution which will help to rebalance markets and provide the price necessary for the development of industry — commented on the decision of the Vice-President and co-owner of LUKOIL Leonid Fedun. — I was optimistic about OPEC, as you know. I am very pleased that this decision was made”.

Indeed, OPEC has a policy to smooth price fluctuations in the market, says Fedun. “I hope that Russia will also support it. It often happens that the freezing [of oil production at the current level] even better reduce [production],” — said a top Manager. “This year and the next (2017-m —) year the oil price will be between $50 and 60 per barrel, within three years it can reach $80 per barrel,” predicts Fedun.

With the participation of Timothy Dzyadko