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BREAKING: Oil price surges as Saudi Arabia backs down and cuts production
Alexander
Mercouris
30
November, 2016
OPEC
announcement of oil production cut causes oil prices to surge as
Saudi Arabia reverses course and agrees to first production cut since
the oil price crash in the summer of 2014.
After
intense negotiations which have been underway for the entire year,
OPEC has finally announced a decision to cut by 1.2 million barrels a
day (roughly 4.5% of current production).
The
biggest production cut is to be carried out by Saudi Arabia, which
has agreed to cut its production by 486,000 barrels per day. In
addition, Iraq will cut production by 209,000 barrels per day, and
Kuwait by 130,000 barrels per day.
One
major producer, Indonesia, has refused to cut its production, and is
suspending its OPEC membership. Another oil producer,
Iran, is being allowed to increase its production to 200,000 barrels
per day from the current 3.7 million.
Non-OPEC
producers are expected to cut their production by 600,000 barrels per
day, the biggest cut being by Russia, which is to cut its production
by 300,000 barrels per day.
The
production cut agreement is to last for 6 months.
The
oil price has immediately recovered on the news, with oil prices
surging by 8% to over $50 a barrel.
This
agreement represents a reverse by both Saudi Arabia and Russia.
Both
of these two major oil producers refused to cut production in
response to the oil price crash in 2014. Both have since
been producing oil at record levels, in the case of Russia 11.2
million barrels per day in October (a post-Soviet record) whilst
Saudi production hit record levels in July at 10.67 million barrels a
day.
Officially
Saudi policy until the start of this year was to allow the oil price
to rebalance naturally. What caused the policy to change?
As
I previously
discussed in
September, the first proposal for a production cut actually came at
the start of the year from the Venezuelan Oil Minister, who toured
the major oil exporting states to lobby for one. Protracted
discussions for an oil production freeze then followed, only to be
held up by bitter disputes between Saudi Arabia and Iran, with Iran
insisting on increasing its production after returning to the oil
market at the start of this year following the easing of sanctions.
The
latest agreement however goes beyond a production freeze, as was
discussed as recently as September, and envisages an actual
production cut.
The
explanation for the Saudi reversal is undoubtedly the growing strains
on Saudi Arabia’s budget caused by the oil price remaining lower
for longer than the Saudis expected. Almost certainly the
Saudis were also spooked by the brief collapse of the oil price to
$25 a barrel at the start of the year, which led to concerns that the
oil price might fall through the floor.
Though
Saudi Arabia has great capacity to borrow money on the capital
markets, its fixed exchange rate means that because of the oil price
fall its budget deficit has yawned to astronomic levels, and forcing
the Saudis to undertake politically sensitive budget cuts to maintain
the confidence of the international financial community. These
budget cuts have however been causing serious
problems,
and it seems that the Saudis have grudgingly accepted that they
simply cannot afford to continue with their present course.
As
for the Russians, with their oil production at a record high and
their budget under control, they probably reckon that they have
called the Saudis’ bluff and can afford what is for them a minor
production cut.
It
remains to be seen whether the oil price cut will be sufficient to
rebalance the oil market. Most commentators suspect not,
but with the Saudis now reversing course and cutting production it is
not impossible that if oil prices fall back more production cuts will
follow.
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