On Wednesday the Organization of the Petroleum Exporting Countries (OPEC) committed to their first oil production limits in eight years. I was actually surprised to hear this because these guys can’t seem to agree on anything.
But, OPEC has come to an agreement to cut production by 1.2 million barrels per day which represents around 4.5% of current production. Commodity market participants, oil production companies, and oil service companies are hoping this move might be enough to push oil supplies below demand levels sooner rather than later.
News of the OPEC agreement sent oil prices soaring today. U.S. Crude Oil shot up almost 10% to just short of $50 a barrel.
Obviously oil prices are still far below their 2014 highs of well over $100 a barrel, but it’s a baby step down the road to recovery. But who knows how long this agreement will last, or how rigidly it will be enforced. These countries have a history of not playing by the rules they set for themselves.
OPEC currently has 14 member countries, including Saudi Arabia, Iran, Iraq, Kuwait, Venezuela, etc. Saudi Arabia is the major player, dwarfing the daily production of the other members.
Although these cuts in production could have a significant impact on oil supply / demand, OPEC certainly isn’t the only game in town. Today, about 58% of the world’s oil output comes from countries outside OPEC.
Russia and the U.S. are huge oil producers that are not OPEC members, with Russia actually being the single largest oil producing country in the world. While OPEC has stated that it is seeking agreements from non-OPEC countries to limit production, nothing has been solidified yet. Without such cooperation, world oil output could actually increase in 2017.
It may be quite some time before we see oil prices approaching their previous highs. It’s nice not paying much for gas at the pump, but the reality is higher oil prices (within reason) are good for the U.S. economy, and that’s especially true right here in Texas.
Source: WSJ, CNBC