OPEC agreed to cut oil production this week by 1.2 million barrels per day in order to raise oil prices. This is the first time that has happened in eight years and it represents about a 4.5 percent cut in production per OPEC member.
That may not sound like much, but this has been an ongoing drama for over two years.
In this week’s announcement, Saudi Arabia engineered a deal that reversed a decision – made two years ago to the day – which intentionally scuttled production quotas in order to allow the world to be awash in oil and drive prices down.
At that time, Saudi Arabia’s intention seemed to be to drive out higher-cost producers, including the budding U.S. shale oil market.
In many ways this strategy succeeded. But many other factors kept energy prices down lower and longer than what the Saudi Kingdom and many others had expected.
Reversing that decision proved to be complicated. OPEC has experienced a series of failed meetings in recent years and its members were seriously hurting from low prices. Consequently, they were pumping more and more crude onto the market to try to raise cash. This obviously made the situation worse for the members as a whole.
This week’s agreement is only for six months, so the proof of success will be if it sticks. It also comes at a pivotal time for the global economy. Many analysts noted that the supply/demand imbalance was finally coming back in line, so oil prices were creeping up anyway.
This agreement should help put a floor under the commodity.
My View: Like all car owners, I cringe at the thought of higher gas prices. But when I look at this on a macro scale, low oil prices really were an imbalance in the global economy that had to eventually be corrected. The trade off for higher prices at the pump will be a more stable global economy.
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