OPEC, the Organization of the Petroleum Exporting Countries, has agreed to implement the ‘Algiers Accord’ and will cut oil production by 1.2m bbl/d as it seeks to curb continued low oil prices and falling investment.
OPEC countries met in Algiers, Morocco at an '‘extraordinary' meeting in September, where they agreed initial terms for a cut in production, the so-called Algiers Accord. It is the first time such a measure has been taken since 2008. The group then set up a high-level committee to make recommendations. At the latest ‘ordinary’ meeting in Vienna, Austria, members considered those recommendations. They have now agreed to cut oil production to 32.5m bbl/d by 1 January 2017 for six months. The production cut could be extended by another six months if it is deemed necessary following an assessment of the markets. Oil prices rose by around 9% as the news broke.
Oil inventories are still well above the five year average, which is contributing to the low price, so members at the conference agreed that stock levels must return to normal. This is vital for the industry, which has seen continued falls in investment and corresponding staff layoffs from 2015 to 2016.
The oil production levels of OPEC countries will fall by around 4.5%. For example, Saudi Arabia, the world’s biggest oil producer, will see production will fall from 10.54m bbl/d to 10.06m bbl/d, while Iraq, the second largest producer of oil, will lower production by 210,000 bbl/d to 4.35m bbl/d. Venezuela’s production will fall from 2.07m bb/d to 1.97m bbl/d and Angola’s from 1.75m bbl/d to 1.67m bbl/d.
The deal was not entirely unanimous, with Indonesia refusing to agree to cut production, resulting in suspension from OPEC. Nigeria and Libya were granted exclusion from the deal. Nigeria’s minister of state for petroleum, Ibe Kachikwu, told journalists that the country is already producing less oil than its OPEC quota allows due to pipeline vandalism and militant activity in the Niger Delta, Nigeria’s oil producing region.
Meanwhile, Libya National Oil Corporation (NOC) chairman Mustafa Sanalla said at the 8th Arab-Austrian Economic Forum in Vienna on 25 November that NOC will not be participating in cuts due to the 'dangerous economic situation' in Libya.
'Libya’s oil can be a force for unity if it is allowed to flow freely. Nearly all Libyans oppose blockades because they harm all of us. The important thing now is that all Libyans should benefit from increased revenues. This will be the real test of whether we can pull through our current political crisis and keep our oil flowing,' he said.
OPEC said that it has consulted widely with non-OPEC countries, including Russia, which agreed to cut its production by 600,000 bbl/d. It will set up a Ministerial Monitoring Committee comprising Algeria, Kuwait, Venezuela, and two participating non-OPEC countries, and chaired by Kuwait, to ensure compliance with the agreement.
As well as implementing the Algiers Accord, OPEC members agreed to adopt a framework for cooperation between OPEC and non-OPEC producing countries.
Jeffrey Currie, head of commodity research at Goldman Sachs, told the Wall Street Journal that the oil process has been rising steadily in recent months in anticipation of the OPEC agreement, and that rising oil prices are good for the flagging global economy. Because of the way financial markets work, higher oil prices lead to more cash liquidity and greater investment, increasing the economy still further. Investment in industry has already risen slightly in the US, the world’s largest economy, which will increase wages and cut unemployment. It will also likely halt deflation and weak consumer markets.
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