Oil prices rose sharply after the OPEC cartel grudgingly accepted the inevitability and agreed to scale down production. The agreement to jointly cut crude production to roughly 33 million barrels of oil per day was reached on Wednesday at an informal meeting in Algiers.
Not able to sustain the low oil prices any longer, Organization of the Petroleum Exporting Countries, or OPEC members, led by Saudi Arabia, decided to deliberately lower production. The countries had so far refused to stem the global glut of the oil supply, which had kept the global prices of black gold exceptionally low for more than two years.
For the first time in eight years, OPEC members have mutually agreed to lower output of the oil wells, reported Reuters. The decision caused oil prices to surge more than five percent within hours, reported New York Times. As per the agreement, OPEC oil production is expected to come down marginally. Instead of pumping oil at a steady rate of 33.4 million barrels a day, OPEC will now bring up the crude somewhere in the range of 32.5 to 33 million barrels per day, reported The Globe and Mail.
While the exact details about who will cut their production the most are not clear, in all likelihood likely it will be Saudi Arabia. The Islamic kingdom is the largest oil producer in the world and is expected to give up about 350,000 barrels a day, indicated a senior OPEC source who was quoting from the final proposal, reported CNN. Other OPEC members will reduce their output as well. However, some of the nations have been excluded from the intentional regression.
Iran, Nigeria, and Libya have been specifically excluded from the decision, and these three nations can pump as much oil as they deem fit. Iran has been permitted to keep its oil production high because it was recently liberated from the decades-long sanctions imposed by America in exchange for a promise to scale down their nuclear program and open the sites for international inspection. Hence, the country is most likely to need the oil exports to fuel its economy. Asking the country to scale back production could hinder its progress as it reopens trade relations with the rest of the world.
Meanwhile, Libya and Nigeria have been engrossed in very brutal and barbaric civil wars. Heavily armed regional militants have been wreaking havoc on the economy by destroying numerous national assets, including oil pumping stations and strategic reserves. The countries need their oil to rebuild these damaged facilities and win the war against organized terror factions.
OPEC members had steadfastly refused to cut oil production for the last two years even after the prices continued their downward spiral. Oil prices had crossed $100 a barrel in 2014. However, due to global oversupply, primarily driven by American shale oil companies, the crude prices kept on coming down. At one of its lowest points, a barrel of oil cost just $26, which is a far cry from its usual rates.
Despite the glut and the poor pricing, OPEC members continued to produce a large quantity of oil on a daily basis. It was a simple tactic to bankrupt the new entrants and force them to back out. Surprisingly, many companies and a few nations refused to bow down and increased their efforts to find ways to keep production high, while finding new ways to cut production costs in the hopes of surviving the excessively low prices.
It is apparent even the OPEC members couldn’t sustain such low oil prices for long, and they were forced to scale back production to push the crude prices up. In the past few months, global crude oil prices have been relatively stable at $47 a barrel. However, with the OPEC members cutting production, the prices are expected to rise.
With the OPEC agreeing to cut less than 1 percent of total global production from all sources, will the prices rise sharply?
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