Will Crude Oil recover following an oil-production cut by OPEC?

Team Veye | 10-Dec-2018 Crude Oil recover

OPEC finally managed to convince allied oil-producing nations including Russia for an oil-production cut, at its headquarters in Vienna, Austria on Friday while concluding the 2 day long meeting. This came as a huge respite after Thursday witnessed difference of opinion in the energy alliance at a closely-watched OPEC meeting where they were unable to agree on the terms of crude output cuts.

The meeting between OPEC and non-OPEC members was scheduled at a time when the oil markets are near the bottom of its worst price dip since 2008. The oil prices had crashed around 30% over the last two months, building up pressure on the budgets in oil-exporting countries.

Although corrective measures were being taken to mitigate this situation and as part of the same,  OPEC began capping supply in partnership with Russia and several other nations in Jan’17 in order to end a downturn in oil prices. The alliance reversed course and agreed to hike output in June after it removed more barrels from the market than it intended, largely due to the ongoing free-fall in Venezuelan output and supply disruptions in Libya.

A major bottleneck was created on Friday morning with Saudi Arabia refusing to agree to an exemption for Iran. U.S. sanctions against Iran, OPEC's third-largest producer, have already significantly reduced its exports. So, Iranian Energy Minister Bijan Zangeneh argued that they should not be forced to cut production in light of the sanctions.

Ultimately, OPEC agreed to exempt Iran, along with Venezuela and Libya. However, Nigeria which was exempt under the previous deal was advised to contribute in this round of cuts. All these negotiations and agreements were made despite opposition from U.S. President Donald Trump.

The alliance will take 1.2 million barrels per day off the market for the first six months of 2019. The 15-member OPEC cartel agreed to reduce its output by 800,000 bpd, while Russia and the allied producers will contribute a 400,000 bpd reduction. The agreed-upon cut turned out to be in line with a recommendation last week from OPEC's Economic Commission Board, which suggested 1.3 million barrels for six months.

This production cut would tighten the oil market by the third quarter of 2019 and cause prices to rise back above $70 per barrel for Brent. As the meeting concluded, crude oil prices rallied but came well off intraday highs. U.S. futures rose 2.2% to settle at $52.61 a barrel. Brent futures climbed 2.7% to finish at $61.67. This was after crude oil prices plummeted on Thursday amid the OPEC meeting uncertainty.

But, now it would be interesting to see if this actually gets implemented as OPEC members are notorious for cheating on their quotas, and Russia had earlier suggested it might not be able to keep up its end of the cut. So, only time would tell if this meeting would benefit recovery of crude oil.


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