Centrum Stosunków Międzynarodowych - 28 September 2016: OPEC agrees to cut oil production

OPEC (Organization of the Petroleum Exporting Countries) member-states agreed on Wednesday, 28^th September to limit their oil production to 32,5-33 mln barrels per day (b/d). This decision entails a cut of 700,000 b/d from current levels and the abandonment of a previous strategy of unlimited production. Markets reacted to the cut, a first in 8 years, with a 5% increase in oil prices. The ultimate decision on per-country production quotas will be made at the next meeting in November. Non-OPEC countries will be also invited then to join these cuts.

OPEC was founded in 1960 and currently had 13 member-states which control around 40% of world’s oil production and around 70% of proven oil reserves. Saudi Arabia retains a dominant position within the organisation and has made a decision in 2014 to maintain previous production levels despite oil prices plummeting below 50 USD per barrel. This strategy was aimed at maintaining market share in the face of the growth of shale oil production and the prospect of Iran re-entry into the market.

Wednesday’s agreement represents an abandonment of this strategy, prioritising revenues over market share. Saudi oil revenues have fallen by about 50% over the last two years, forcing painful budgetary cuts. Saudi Arabia made an important concession in exempting Iran from production quotas, underscoring the recent prioritisation of economic interests over geopolitical considerations. A similar exemption was made for Nigeria and Libya, whose oil production infrastructure had been damaged by terrorist attacks and military operations.

While oil prices jumped after the announcement of the cuts, the prospects of the new strategy are unclear. OPEC’s market share gives it a dominant, but not exclusive, control over oil prices Moreover, higher prices would make it profitable to extract oil from more difficult fields which require capital-intensive production technology. Finally, enforcing production quotas has proven difficult. For these reasons, both Goldman Sachs and Société Générale maintained their previous long-term oil price forecasts.