OPEC Agrees to a Production Cut: Now What?

OPEC Agrees to a Production Cut: Now What?

Oil traded above $50 and crude producers rose after OPEC approved its first supply cuts in eight years, with the focus now shifting to how strictly the group will implement the deal.

Strength in Middle East crude benchmark Dubai may also further narrow its price gap against Brent, leading Asia refiners to buy more oil from the Atlantic Basin and the Americas, traders said.

Opec produces a third of global oil, or around 33.6 million barrels a day, and under the Wednesday deal it would reduce output by around 1.2 million bpd from January 2017.

Russia's Energy Minister Novak had earlier said that Russian Federation would suspend 2017 production increases in support of OPEC, but instead Russian Federation agreed to actually reduce current production levels.

The deal has received a mixed reaction from analysts, with some forecasting that any price rise may be shortlived, with U.S. producers likely to take advantage of the oil price rise to boost production, and that the production cut is insufficient to make much of a dent in the supply glut.

"OPEC has done its best to stabilise the market in the $50-$60 price range, but if they fail to deliver in the coming months, make no mistake, oil prices will fall well below the $40 mark again". Iraq had a last-minute change of heart by agreeing to curb output by 200,000 barrels a day. It added that the deficit could rise to more than 1 million barrels a day by the second half of next year.

The lone dissenting note came from Indonesia, the East Asian member of the oil cartel that rejoined the producer group only this year, saying it was not willing to comply with the output cuts and that it would rather suspend its Opec membership.

OPEC has made a decision to cut its oil output by 1.2 million bpd, setting the ceiling of oil production at 32.5 million bpd. "It isn't clear the OPEC meets either of those criteria today".

The price of the commodity has fallen by more than half since mid-2014.

The Saudis had always been hesitant to shoulder the lion's share of a cut, while Iran had resisted reducing its own production.

OPEC on Wednesday agreed to reduce its combined output by 1.2 million barrels a day, the upper end of expectations of 0.7 million to 1.2 million barrels, for six months from January.

A ministerial monitoring committee consisting of Algeria, Venezuela, Kuwait and two participating non-OPEC countries will monitor deal implementation and compliance, working closely with the OPEC secretariat. Not only were they able to negotiate an agreement among member countries, but even convinced some non-OPEC members to join in to the agreed production decline. An abundance of oil on the market, thanks in part to a fracking boom in the US, pushed the price of oil from around $80-$110 a barrel in 2014 to around $30 a barrel.

"This should be a wake-up call for skeptics who have argued the death of OPEC", said Amrita Sen, chief oil analyst at Energy Aspects Ltd.

"The market will no longer see a sudden plunge in oil prices", Seo Sang-young, a market strategist at Kiwoom Securities, said by phone from Seoul.