OPEC cuts will have a muted effect on consumers

Despite early doubts it was possible, members of the Organization of Petroleum Exporting Countries reached an agreement to set a target production of 32.5 million barrels per day “in order to accelerate the ongoing drawdown of the stock overhang and bring the oil market rebalancing forward”.

In another reflection of new-found discipline within the cartel, Al-Sada said Indonesia’s membership had been suspended after it refused to accept its share of proposed output cuts, reducing the number of OPEC countries to 13.

The agreement is also an important victory for Iran.

Both Goldman and Barclays said oil prices would quickly move above $50 per barrel if a production cut is agreed by OPEC.

Although Riyadh has taken the bulk of production cuts, it is still producing nearly three times as much oil as regional rival Tehran, and will therefore still be in possession of a far larger market share.

“Not only had hopes of higher prices been realised, the reputation of the OPEC has also been salvaged, prompting the surge”, said Jingyi Pan, market strategist at IG in Singapore.

Amid rising speculation, anticipation and skepticism, OPEC leaders were finally in tune with an output cut on November 30 in Vienna. There is still more supply than demand — the reason oil prices collapsed beginning in mid-2014.

Almost $1 trillion in capital investment in global oil and gas has been cut or delayed, according to Wood Mackenzie.

This post was syndicated from The Independent Uganda:.

On the demand side, cold weather in the biggest LNG importing countries is also lifting prices as many traders expect utilities in Japan, South Korea and also China to turn to the spot market to buy cargoes to meet strong heating demand.

After the deal was announced on Wednesday, the market focused on the implementation and impact of OPEC’s first output cuts since 2008, to be joined by Russian Federation and possibly other non-OPEC producers.

OPEC’s cut in production is expected to go into effect in January.

The combined cut will result, at least in the short term, in somewhat-more-pricey oil – and, by extension, gasoline, heating and electricity.

Both the magnitude and shorter time cycles of USA shale oil are now acting as significant new constraints on OPEC’s ability control oil prices and the producer group may not have the power long feared following the Arab Oil Embargo of 1973 to manipulate oil prices.

Despite the optimism for recoveries in the Bakken and Eagle Ford, US producers will likely remain cautious well into next year while watching crude prices and the massive storage glut before moving rigs back into place, analysts said.

The downturn has made USA shale drillers leaner and meaner, with cost-cutting and productivity improvements lowering break-even profit levels all the time.

This year, the price dipped below 30 U.S. dollars a barrel. The Saudi strategy tested the endurance of shale drillers and found it remarkably resilient. Even with a 1 million b/d supply cut, it will take 1.5 years for OECD inventory levels to stabilize, he said.