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  December 1st, 2016 | Written by

OPEC Reaches Oil Output Reduction Agreement

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  • OPEC agreed to reduce daily oil output by 1.2 million barrels.
  • Oil prices spiked on the news of the OPEC agreement.
  • The OPEC agreement was easy on Iran.

The thirteen members of the Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna, reached an agreement yesterday to reduce oil output by 1.2 million barrels a day beginning next month.

The agreement brings the OPEC output ceiling to 32.5 million barrels per day effective of January 1, 2017.

Oil prices spiked on the news, as did futures, gaining 9.3 percent in New York yesterday, the biggest gain since February. The price per barrel exceeded $50 in many markets.

The output cuts represent a 4.6-percent decrease in output across the board for most members. The agreement cut Iran some slack, allowing a 2.2-percent output cut for the Islamic Republic. Iran, recently emerging from sanctions associated with its nuclear program, is anxious to accumulate oil revenues. Since nuclear sanctions were lifted, Iran’s oil production has jumped by nearly one-third.

The agreement also noted that non-OPEC countries, most notably Russia, also agreed to a 600,000 barrel per day decrease in production.

The question for markets is whether the production ceilings will actually be observed. Since 2014, OPEC has consistently refused to cut production, even in the face of plummeting oil prices. That situation changed in October, when a preliminary agreement reached in Algiers capped production at 33 million barrels per day. But numbers released in the aftermath of that development showed production had soared to all-time highs in September, at over 33.6 million barrels per day.

OPEC’s refusal to cut production between 2014 and 2016 was thought to have been motivated in part by the hope that low oil prices would drive some North American shale oil production from the market, a circumstance which has come about. But if the production ceiling sticks, and prices rise, some U.S. shale oil production could come back.

Low oil prices have hurt segments of the shipping industry, as project, breakbulk, and multipurpose carriers have all felt the sting of cutbacks to exploration efforts.

The duration of the Vienna agreement is six months and is extendable for another six months. The agreement also established a ministerial monitoring committee composed of Algeria, Kuwait, Venezuela, and two non-OPEC countries, and chaired by Kuwait. That committee, to be assisted by the OPEC secretariat, is “to closely monitor the implementation of and compliance with” the agreement and to “report to the conference.”