Can OPEC members reach an oil reduction agreement?

Can OPEC members reach an oil reduction agreement?

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Will the faint rise in OPEC’s oil prices improve the United States economy, or will it continue to decline as usual? This bothered me because the glut in oil production ruined the price of oil in the United States in 2008. The answer lay in whether the nations of OPEC: Iran, Iraq and Saudi Arabia, were able to reach an agreement on November 30 in Geneva as to how much to reduce their oil output.

Right now, the biggest issue among the OPEC nations is how much each member is to reduce oil production. The catalyst being Iran, who did not want to reduce the number of barrels of oil it produced. This also went against the rules Saudi Arabia followed. Being its biggest producer, they had the idea that by over production, they were able to drive other American producers, who produced shale oil, oil from rock sediment and clay, out of business.

Saudi Arabia and Russia relied on oil to improve their economies. Of late, they all suffered. Saudi Arabia had to cut spending on public programs in its economy to absorb the loss of low output and save their financial reserves. Iran is still suffering from the imposed sanctions of 30 years ago. They were one of the last holdouts to the November 30 agreement. Other countries, like Lybia and Nigeria were also turning to oil for economic growth after years of infighting. Apparently, Russia might have failed in trying to open up an oil and gas pipeline through theUkraine into Syria, where it had a base to fight ISIS. If Vladamir Putin had what he needed, he wouldn’t have to sit at the OPEC bargaining table.

Even though this OPEC oil reduction was meant to hold up the price of oil, it might cause further ruffled fir among the members if the United States continued shale oil drilling. That’s why this price war was created. A cut in production could boost oil prices through this untraditional method of drilling for oil and steady the market.

OPEC has so far only reached a preliminary agreement to strike a deal to cut production by 200,000 to 700,000 barrels a day, from 33.2 million barrels. The breakdown of which countries will trim output is expected to be worked out by its November meeting. But BofA points out that Saudi Arabia normally cuts back at this time of year. The Saudis produced about 10.6 million barrels a day last month.

“After all, Saudi has cut production seasonally by 320,000 (barrels per day) every year between July and January. The move in Algiers may reflect the impending fiscal pressures, as many OPEC government budgets are starved for cash. Also, it is critical to remember that pegged currency regimes across many oil producers have put a huge strain on foreign exchange reserves in key OPEC members,” the BofA analysts wrote.

As for the U.S., domestic oil production has been around 8.5 million barrels a day recently, down by about 1.1 million barrels a day from the all-time high in the spring of 2015. In November 2014, OPEC, led by Saudi Arabia, gave up on production levels and opted for a new strategy of letting the market determine oil prices. Producers, from the U.S. to Russia and Saudi Arabia, kept pumping and created a giant oil glut. Oil plunged, and ultimately hit a bottom in February 2016 at just about $26 per barrel.

Saudi Arabia’s aim went beyond revamping their economy. They also wanted less dependent on oil in its Vision 2030, where two-thirds of the jobs existed in the public sector. Right now, though, their role was to steady the fledgling oil market. Let’s hope they can.

 

 

Sources:

Sean Farrell Oil price and stock markets rise as Opec cuts crude output 9/29/16

Patti Domm OPEC’s ‘truce on oil prices’ could be quickly shattered by more shale production 9/29/16