An OPEC agreement was reached Wednesday to cut back on oil production. This was quite unexpected and contrary to expectations as reported by Market.biz earlier. Oil prices increased by 6% when the agreement was announced. This was the first vote in favor of production cuts for eight years.
Output by member countries is to be limited to between 32.5 million and 33 million barrels a day. The agreement surprised most observers who had expected Iran to refuse any deal. Iran’s stance prior to the meeting had been to block any move for a reduction in oil output until it had reached pre-sanction levels. Iran’s oil production is currently steady at just below this.
Surprisingly, the agreement was for OPEC member nations to reduce production by around 700,000 barrels a day. However, this level of production would not be shared evenly by all members. Iran will be permitted to increase its production.
This was an informal meeting, and full details of the OPEC agreement will be discussed at the official meeting in November. Some traders are left unconvinced. The lack of detail, on what seems to be more of an understanding than a firm agreement, has led some to question whether or not it is binding. Traders and investors are not convinced that all, or any, OPEC member countries would take action.
Because of the uncertainty, oil prices began to drop again over Wednesday and Thursday and Brent crude had dropped by 0.5% to $48.46 a barrel Thursday morning after a high for Wednesday of $49.09. This is still very low compared with the high of $110 around two years ago.
Some commentators are cynical regarding this informal OPEC agreement. It is believed that OPEC was due to reduce output in any case. We are coming into a season when power needs will be lower in the west and there will be a natural drop in oil demand. Crude stocks are still high and there would be little to gain, if anything, by increasing them still further.
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