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On Monday, Saudi Aramco (Saudi Arabia's giant national oil company) confirmed that it would abide by its production cuts under the Vienna Accord, OPEC's deal to cut oil production.
The Saudi commitment is to lower its oil supply by 300,000 barrels a day, and the production action took effect with deliveries this month.
This latest announcement now allows the pact to extend into February.
The Vienna Accord was announced by OPEC on Nov. 30 and marks the first time in years the cartel has taken such an action. Subsequent negotiations with non-OPEC producers, especially Russia, resulted in a breakthrough aimed at improving global crude oil prices by reducing supply.
With the other two leading OPEC producers – the United Arab Emirates and Kuwait – also meeting (or in the case of Kuwait, exceeding) their required production cuts, the accord now has a chance of extending the positive impact of rising prices.
But it does not come without a cost, in one region of the world in particular…
The Accord Will Hold, for Now
Global markets were briefly impacted over the weekend by news that Russia had dramatically increased its production. Some analysts expressed concern that Moscow was scuttling its adherence to the accord.
That would have huge impact, as the agreed-to Russian cut of 300,000 barrels a day matches that of the Saudis.
However, the reaction was overdone.
Moscow calculates its production time frame differently from other countries. As it turns out, the production spike was engineered before the cuts were to take effect. While this may go a bit against the "spirit" of Vienna, it's no worse than what others (including a number of OPEC members) have also done.
The accord provides an aggregate production target of some 27.5 million barrels a day worldwide.
Everybody recognizes that it will take several months for the "new normal" in global oil supply levels to take hold. Remember, as I've noted on several previous occasions in Oil & Energy Investor, it's not how high prices go that will determine the sustainability of a trading range.
And so long as the Vienna Accord holds, that floor will continue to rise, albeit slowly.
Ultimately, the predictability will come from traders and the way in which they peg contract prices based upon the expected cost of the next available barrel. As the actual pricing floor rises, the contract price will rise in advance, accordingly.
However, the aftermath of the cuts is hardly all good news, especially for OPEC…
Higher Oil Prices Don't Guarantee Higher OPEC Revenue
As the cuts kick in, central budgets already saddled with ballooning deficits from declining crude prices are now facing languished export revenues from reduced sales.
As always, the remedy is a balance between budgets and export proceeds. But this is going to take a while to work itself out.
In the interim, concerns are already surfacing.
The International Monetary Fund (IMF) this week has dramatically reduced its Saudi …
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.