Non-OPEC producers agree to cut oil output

•  OPEC and non-OPEC producers reached their first deal since 2001 to curtail oil output jointly and ease a global glut after more than two years of low prices that overstretched many budgets and spurred unrest in some countries.
• Russia, which 15 years ago failed to deliver on promises to cut in tandem with OPEC, is also expected to perform real output reductions this time.
• In the first week of December, OPEC agreed to slash output by 1.2 million barrels per day from Jan. 1, with top exporter Saudi Arabia cutting as much as 486,000 bpd.
• By the end of March Russia would be producing 200,000 bpd less than its October 2016 level of 11.247 million bpd – Russia’s highest production estimate so far. Russian output would fall to 10.947 million bpd after six months.

About Organization of the Petroleum Exporting Countries (OPEC):

• The OPEC is an intergovernmental organization of 14 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.
• Established: 1960 in Baghdad, Iraq by the first five members.
• Headquarters: Vienna, Austria.
• OPEC Members: Algeria, Angola, Libya, Nigeria and Gabon (from Africa); Indonesia, Iran, Iraq, Saudi Arabia (the de facto leader) Kuwait, Qatar, United Arab Emirates (from Asia); Ecuador and Venezuela (from Latin America).
• As of 2015, these 14 OPEC member countries accounted for an estimated 43% of global oil production and 73% of the world’s oil reserves.
• Two-thirds of OPEC’s oil production and reserves are in its six Middle Eastern (west Asian) countries that surround the oil-rich Persian Gulf.

Analysis:

• This deal will speed up the oil market stabilization, reduce volatility, and attract new investments.
• Oil prices have more than halved in the past two years after Saudi Arabia raised output steeply in an attempt to drive higher-cost producers such as U.S. shale firms out of the market. The plunge in oil to below $50 per barrel – and sometimes even below $30 – from as high as $115 in mid-2014 has helped reduce growth in U.S. shale output.
• But it also hit the revenues of oil-dependent economies including Saudi Arabia and Russia, prompting the two largest exporters of crude to start their first oil co-operation talks in 15 years.
• OPEC and the non-OPEC countries at the meeting were responsible for 55 per cent of global output. Their joint reduction of around 1.8 million bpd would account for about 2 per cent of global oil supply.
• Many non-OPEC countries such as Mexico and Azerbaijan face a natural drop in oil production and many expressed doubts those declines should be counted as cuts.While a lot of the countries are formalizing natural declines, cuts by Russia, Kazakhstan and Oman are real. Russia and Kazakhstan were between them expected to add 400,000 bpd to production next year.
• If OPEC cut output by up to 700,000 barrels a day, the production glut would disappear as soon as the end of this years. The world’s inventories could then be drawn down and prices could rise.
• OPEC has been producing at record levels as its members compete among themselves for buyers. Saudi Arabia, the group’s largest producer, has also been pumping at record levels in recent months and was expected to slow down output in the fall and winter anyway.
• India, being the 3rd largest importer of crude oil imports 85% of total oil and 95% of natural gas from OPEC nations. In recent time due to cheaper oil prices in international market due to overproduction and non-coordination among OPEC countries Indian economy had immensely benefited. However, this decision may result in spike in oil prices which can have major implications for the India’s current account deficit and overall economy in general.
• In recent times, lower oil prices kept the Indian economy on the shining path and managed to keep inflation under control making it fastest growing economy in G20 countries.

By: Vishal