The overproduction that has kept oil prices low for the past two years is seemingly coming to an end with OPEC’s decision to cut production by 1.2 million barrels per day. Coupled with lagging demand due to weak economies in Europe and developing markets, and more energy-efficient vehicles, the suppressed prices have put pressure on OPEC 13-member economies. Their decision is on the low-end of what many economist had estimated, meaning this could be a happy medium between drastic cuts and price stabilization.
Saudi Arabia, OPEC’s largest producer, agreed to cut production by nearly 500 million barrels a day, the most out of any member country. Iran was given the nod to freeze- rather than cut- their production to meet pre-sanction output levels.
History has shown that a verbal agreement by OPEC does not necessarily result in actual production cuts. And while this agreement should boost crude prices short-term, it may not be enough to balance supply and demand. Countries outside of OPEC with higher costs of production may actually start to ramp up their output if crude prices continue to increase. US shale producers in particular have been patiently waiting for prices between $50-55 a barrel as they are not profitable at current levels. Our assumption is that while beneficial short-term, any upward price momentum will be stymied by domestic shale production increases, and the roller coaster ride in oil will likely continue into 2017.
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