Oil Prices Push up after OPEC’s Production Cut

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The price of Brent crude, the international benchmark for oil prices, jumped above $52 a barrel on Thursday after the Organization of the Petroleum Exporting Countries agreed to cut production by 1.2 million barrels.

The move marks the group’s first concerted effort to slash output since 2008 and sent prices soaring by more than 10% overnight.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in January traded at $50.13 a barrel, up $0.69, or 1.4%, in the Globex electronic session. February Brent crude on London’s ICE Futures exchange rose $0.70, or 1.4%, to $52.56 a barrel, the highest level in more than a five weeks.

The OPEC cut represents about 1% of global production, which will help to reduce a supply glut that has depressed prices for more than two years. The promised cuts include significant reductions by heavyweights including Saudi Arabia, the group’s most powerful member and de facto leader.

Analysts say the biggest question remains enforcement, as OPEC has no authority to make its members comply. OPEC members have a record of cheating by producing beyond their allotted quotas.

Under the pact, Saudi Arabia is expected to take the lion’s share of the cuts by slashing production by 486,000 barrels a day. Iraq had a last-minute change of heart by agreeing to curb output by 20,000 barrels a day. Meanwhile, struggling producers such as Nigeria and Libya were exempt from the deal as their production has been hampered by militant attacks. Iran was given special leeway to increase production slightly above its October level.

The group is expected to reassess the effectiveness of the deal in six months.

The deal is expected to accelerate the re-balance of supply and demand in the market, which will likely shift to a 500,000-barrel deficit in the first half of next year. It added that the deficit could rise to more than 1 million barrels a day by the second half of next year.

Higher prices, however, are likely to cause more U.S. shale producers to increase production.

The latest production data from the U.S. Energy Information Administration showed U.S. production increased by 9,000 barrels a day to 8.7 million barrels for the week ended Nov. 25.

A price increase of $10 to $15 a barrel may also blunt the appetite of some oil consumers in Asia who beefed up inventories recently by buying when prices were in the $40 range, analysts say.

Another wild card is the cooperation of non-OPEC producers, who are expected to decrease production by 600,000 barrels a day. Russia said it would cut production by 300,000 barrels a day, though it isn’t clear how much of that will come from already expected declines.

 

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