OPEC Announces First Production Cut in 8 Years
The Organization of Petroleum Exporting Countries (OPEC) concluded their formal meeting on Wednesday 30th November 2016 with an agreement to cut production levels. This ratifies the ‘Algiers Accord’ which took place on 28th September, when planned cuts were first announced. The announced cut is a clear positive for near term oil prices and will tighten the oil market in 2017.
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What has been announced?
OPEC have opted for a new production limit of 32.5million (m) barrels per day (b/day), representing the first action from the group since November 2014 and the first quota cut since 2008/09. The ‘referenced’ OPEC production, for October 2016, and used as a starting point for the cuts, was around 33.7m b/day, so the announcement represents a cut of 1.2m b/day (all numbers for OPEC-14 including Gabon). This ratifies the ‘Algiers Accord’ which took place on 28th September, when planned cuts were first announced. There is also an understanding that non-OPEC, including Russia, will cut production by 0.6m b/day, which would bring the total reduction to 1.8m b/day – well in excess of most expectations in the lead up to the meeting.
The announcement amounts then to a 5% cut for all members except for 1) Libya and Nigeria, recognising their unusually depressed levels of production due to unrest, and 2) Iran, recognising its journey back to normalised production post the lifting of sanctions in January 2016. Indonesia has been suspended from the group since, as a net importer of oil, it chose not to participate.
The agreed cuts are effective from 1st January 2017, and will be kept in place initially for six months, extendable for another six months depending on how the oil market evolves.
Unexpectedly, the OPEC agreement also contains official reference to non-OPEC production: “This agreement has been reached following extensive consultations and understanding reached with key non-OPEC countries, including the Russian Federation that they contribute by a reduction of 600k b/day production”. It is understood that Russia has agreed to shoulder 300k b/day of cuts, while other unnamed non-OPEC countries will share the other 300,000 b/day.
OPEC have also taken the unusual step of establishing a ‘Ministerial Monitoring Committee”,
including OPEC and non-OPEC members, to monitor implementation and compliance with the
agreement. We think this gives an indication of strong intent to see the cuts through.
To see the OPEC production cuts agreed by each member country and implications of the cut, read our bulletin OPEC Announces First Production Cut in 8 Years.