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4 questions to consider after OPEC announces it might cut oil production


Written by Jeffrey Weiss

Click HERE to Read the Article by the Publisher.

Reports that OPEC has reached a deal today that would cut oil production have come as somewhat of a shock to the market and sent oil prices soaring.

As recently as yesterday, many news outlets were reporting there wasn’t a deal. And maybe there would never be a deal.

But OPEC leader Saudi Arabia has apparently put aside its disagreements with Iran for the time being.  Sources say OPEC  has agreed to cut its output by three-quarters of a million barrels per day.  While details remain sketchy, it would be the first time OPEC has cut production since 2008, according to Reuters.

The reason? Low oil prices are hurting OPEC members as much as other producers, and while OPEC had tried to ride out the slump, its members are starting to feel the pain.

From the Reuters article:

“Saudi oil revenue has halved over the past two years, forcing Riyadh to liquidate billions of dollars of overseas assets every month to pay bills and cut domestic fuel and utility subsidies last year.

‘The Iranians have lived with a very tough macro backdrop for many years …,” said Raza Agha, chief Middle East economist at investment bank VTB Capital. “So a sustained drop in oil prices has a more difficult social impact on Saudi.’ “

Domestic crude oil prices spiked on the news. Irving-based Exxon Mobil jumped more than 4 percent. Apache Corporation, which announced earlier this year a huge discovery in the Delaware basic, was up more than 6 percent. Other oil stocks also had a happy day.

So what does this mean for oil markets domestically and internationally? It’s unclear right now, but here are four questions to consider:

  1. The cartel produces about 40 percent of the world’s oil. The Reuters report says OPEC plans to cut about 2 percent of its production — or less than 1 percent of the world’s petroleum production. Is that enough to significantly affect prices?
  2. The exact cuts per country are supposed to be hammered out in a November meeting. But as of yesterday, news reports said Iran was telling the Saudis to go pound sand. Will a deal actually be struck in November, once the details become clear?
  3. The issue of non-OPEC countries is not trivial. If Russia, the United States, China, Mexico, Canada, Norway and Brazil decide that a drop in OPEC output is just an invitation to ramp up their own production, what will be the effect on supply and prices?
  4. Say the OPEC deal does happen in November. If today’s market reaction means anything, crude oil prices will already have gone up a bit. What does that mean for domestic oil companies, particularly those in Texas, where shale oil fields are there for the fracking to produce enormous amounts of oil and gas?

There’s actually been one interesting answer to that last question just today. The Dallas Federal Reserve Bank put out its report on the energy sector. A survey of companies indicates that a lot of oil executives figure $55 a barrel would be enough to trigger new significant pumping. Even $50 would push some new production. Would that be enough new supply to keep prices from rising further?

Bloomberg wrote about that last question back in February. Here’s the money quote about the effect of an OPEC cut on oil exploration companies in Texas, Oklahoma and North Dakota:

“If you think about making a production cut as OPEC, prices rise and these producers can get oil online in 80 days,” Jeff Currie, Goldman Sachs Head of Commodities Research, said on Bloomberg TV. “It makes any type of price rally self-defeating.”

Tags: oil, gas, crude, OPEC

Written by Jeffrey Weiss

Click HERE to Read the Article by the Publisher.