Oil prices have surged by more than 5% in the wake of OPEC’s commitment to cut output for the first time in eight years. The group's surprise reversal of its ‘pump-at-will policy’ that was adopted in 2014 will see member countries limit total output to a range of 32.5 to 33 million bpd, effectively re-establishing OPEC production ceilings. Although modest, the deal will bolster the morale of the energy industry and boost the economies of oil rich countries.
The agreement was made possible by Saudi-Arabia’s concession to curb its own output by up to 350 000 bpd while allowing its arch-rival Iran to continue producing. It is hoped that Saudi-Arabia’s willingness to do a deal signals a new phase of relations between the two member states who have historically disagreed on oil policy.
The idea of introducing a country quota for oil output has long been in circulation, however, exactly how much each country will produce will not be decided until the next formal OPEC meeting in November. However, it will be important for OPEC to convince producers outside the group, such as Russia, to cap their output in order to truly kick start an oil price recovery.
Too little too late?
It remains to be seen whether the optimism that has sparked the increase in oil price will stabilise the market. The global oil industry currently produces an extra 1.5 million bbls more than needed each day, and a 700 000 bpd cut will certainly not eliminate the glut which has persisted since 2014. However it appears to a step in the right direction towards reducing the economic uncertainty that has plagued oil producers during recent years.
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