Despite the significant upswing in the oil prices, the price of West Texas Intermediate (WTI) crude oil has merely retested its June and October 2016 highs.
OPEC’s accord also isn’t as surprising as some commentators have suggested. Oil ministers talked down the prospects of a deal in the run-up to the meeting, perhaps as a bargaining ploy or to provide a cushion if OPEC members failed to reach an agreement.
When OPEC members jawboned prices lower, WTI sold off; when the organization announced a deal to cut production, oil prices snapped back to levels last seen a little over a month ago.
As the meeting approached, we put the odds of a deal at 50 percent and the likelihood of a meaningful agreement to reduce production at about 20 to 30 percent.
The agreement calls for a production cut of 1.2 million barrels per day, plus another 600,000 barrels per day from non-OPEC members. Russia is expected to account for a third to half of the non-OPEC cut, though policymakers have since asserted that it could take time for the country to comply.
Saudi Arabia took the lead on cuts, agreeing to reduce its oil output from the reference level of 10.544 million barrels per day to 10.058 million barrels per day, starting in January. This cut of 486,000 barrels per day was lighter than we expected.
The kingdom lifted 10.67 million barrels of crude oil per day in August and has already reduced its output by 80,000 barrels per day from this peak. Saudi Arabia usually reduces its output by 300,000 to 400,000 barrels per day between the end of summer and January, because demand for air conditioning declines in the fall and winter.
Based on these historical norms, Saudi Arabia’s oil output would decline to as low as 10.28 million barrels per day by January 2017. Accordingly, Saudi Arabia’s effective production cut amounts to about 200,000 barrels per day—less impressive than the headlines would suggest.
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