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Skepticism aside, OPEC production cuts have worked before

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Posted by David Hunn

Click HERE to Read the Article by the Publisher.


OPEC has agreed to cut oil production three times over the past two decades in response to precipitous drops in oil prices.

Each time, the Organization of the Petroleum Exporting Countries was successful in curtailing production and eventually raising crude prices, the investment banking firm Piper Jaffray & Co. said on Thursday. But it also took multiple cuts, every time, to persuade crude prices to rise again.

Analysts and onlookers were uniformly skeptical of the news coming out of Algiers on Wednesday, where OPEC met to discuss a new production cut. By the end of the day, multiple cartel leaders said they had agreed to chop their collective output by as much as 750,000 barrels per day — but they gave few details, and said final decisions wouldn’t be made until their next meeting, in November.

Skepticism is understandable, said Bill Herbert, a senior analyst at Piper Jaffray. But conciliatory comments from Saudi Arabia and enthusiasm from Iran suggests OPEC leaders are cooperating. “The probability it will take production off the market has risen considerably,” Herbert said.

And, if they get the deal done, history shows that the price cuts have indeed worked.

In the summer of 1997, stock market crashes and government upheaval in South Asia sent oil prices tumbling from about $25 a barrel to under $11 by the end of 1998. OPEC cut production by 2.3 million barrels a day, and by the winter of 1999, prices were back at $25 a barrel.

Prices began falling again in 2000, a descent that steepened after the U.S. terrorist attacks in September, 2001. By the end of that year, they had fallen from about $36 a barrel to less that $20. Over 15 months beginning in late 2000, OPEC removed 5 million barrels per day from the market. By the end of 2002, crude rose to $31 a barrel.

OPEC slashed output again after the 2008 financial crisis as U.S. oil prices plunged from a record $145 a barrel to under $35. The cartel reduced quotas by 4.2 million barrels per day through three separate cuts. By the end of 2009 crude was trading close to $80 per barrel.

Keep in mind, Herbert said, it takes time to reduce production. OPEC has yet to spell out how the cartel will cut output, and tankers now en route will still deliver crude. Still, if the cartel can agree in November, oil prices may be on their way up.

“It has worked before,” Herbert said.


Tags: oil, crude, OPEC


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Posted by David Hunn

Click HERE to Read the Article by the Publisher.

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