Oil prices have risen another four percent this week. Brent Crude is now trading at a 16-month high. After a long period of inability to strike a deal, the OPEC nations have finally agreed to cut output. When it takes effect, it will be the first cut in the last eight years. The move will also be joined by Russia. Iran, a nation which recently was taken off embargo on international oil sales, will join in the cuts as well.
There are doubts, however, as to whether these nations will stick with the agreed cuts. But, without this agreement, oil could have fallen to under $40 a barrel, a price level more common lately. Now, Brent Crude has risen above $50 and some analysts, such as Simon Flowers of Wood Mackenzie, expect oil to trade between $55 and $60 on the average in 2017.
At present, OPEC produces 33.7 million bpd (barrels per day). Under the new agreement, production will be cut to 32.5 million bbp. Middle Eastern states including Saudi Arabia, Iraq, Kuwait, and the United Arab Emirates will make substantial cuts. Saudi Arabia alone agreed to cut oil production by 500,000 bpd to slightly above 10 million bpd. Meanwhile, Iran will set its production at 7.8 million bpd.
Libya and Nigeria, however, will be exempted from the deal as their oil production has already declined as a result of civil unrest. On the other hand, Venezuela, all despite its economic hardships, will cut its production by nearly 100 million bpd.
This deal is noteworthy especially from the perspectives of Iran and Iraq. Iran is seeking to benefit from lifted sanctions, while Iraq needs money to recover from prolonged civil war. Overall, most oil-producing nations have suffered from decline in prices, and now want to end years of cheap oil.
The OPEC announcement led to increased trading, especially for February and March futures. At the same time, the premium between Brent and U.S. Crude (NYMEX) has become the biggest in ten weeks.
Although there's a growing optimism among oil investors, Goldman Sachs' analysts aren't that excited about the prospects of future oil price. "We do not believe that oil prices can remain above $55 per barrel," they claimed. The reason cited is the production in the United States.
It is expected that if oil reaches $60 a barrel, more production will be started in America as at that price level it will pay to produce oil for many shale oil drillers. This supply has been credited for recent years' drop in oil prices from well over $100 a barrel to less than $40.
The OPEC nations are to hold talks with non-OPEC producers in the coming days and will also meet again in May to monitor the deal. In the past, these nations often have found it hard to reach and stick to the deals, and there's no strong unity among them. Just a few days ago, Indonesia got suspended from OPEC.
Whether this deal is ground-breaking is yet to be seen. In the past, OPEC nations have cheated on each other. And there's the United States not willing to participate in the cuts.