OPEC members agreed today to cut back on their crude oil production.  This is the cartel’s first cuts in eight years. OPEC accounts for a third of global crude oil production.

OPEC will reduce production by 4.5% or by 1.2 million barrels a day (b/d) to 32.5 million b/d. However, Iran will be allowed to increase production. The move is expected to help the struggling finances of oil-producing countries while boosting other markets around the world, from the value of the Canadian dollar and Nigerian bonds to US shale equities.

Implementation of the agreement will start in January and last for 6 months.

It appears Saudi Arabia accepted that Iran can raise output to about 3.9 b/d. Iran has long fought for special treatment as it recovers from years of nuclear sanctions. One source said Saudi Arabia will cut its production by 1/2 million barrels per day to 10.06 million b/d.

The agreement is also likely to call for a reduction of about 600,000 barrels a day by non-OPEC countries, such as Russia. OPEC is likely to hold talks with non-OPEC producers on December 9th.

Investment banker Morgan Stanley said Monday that an OPEC agreement could boost crude prices by $5 a barrel or more.

However, there are skeptics who wonder if the “deal” will hold.  Carsten Fritsch, an analyst at Commerzbank AG said:  “The devil is in the details. We will have to wait for a country by country breakdown and determine whether it’s reliable or not.”

Many important questions remain, including how countries will be held accountable for these cuts, whether countries will self-report production numbers or “secondary sources” (outside organizations) accounting will be used.

Some expect that once crude oil hits $60 a barrel, it becomes more profitable for US shale oil companies to start resuming production from their large fields in the states of North Dakota, Texas and Pennsylvania. OPEC had lowered prices in an attempt to shut down the US shale oil industry.

As of this writing both US West Texas crude and Brent crude were hovering around $50 a barrel.

 

Note: all prices are in US dollars.

 

UPDATE:  Sources say that OPEC will be meeting with the Non-OPEC members in Vienna on December 10th to discuss other countries also cutting their production to assist in boosting world oil prices. OPEC is hoping non-OPEC countries will contribute another 600,000 barrels per day to the cut. Russia has said it will reduce output by around 300,000 bpd.

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