With all eyes on OPEC in anticipation of oil production cuts, the fractured group has finally reached an agreement to cut oil production by about 4.5% off current production levels. That translates to about 1.2 million barrels per day.
The cuts were needed because of the uneasy economical environment that has been plaguing the oil producing countries since the U.S. lifted sanctions on Iran. Despite the signing of the agreement, it will be up to Saudi Arabia’s official to be diligent about policing other cartel members that in the past have been quick to look for ways to circumvent these types of agreements. The ultimate goal is to get oil prices stabilized within a range that allows OPEC members to improve economically while keeping non-OPEC members from increasing output productions levels, trying to capitalize on higher oil prices.
The immediate reaction from commodity traders and analysts has largely been positive. While recent oil prices have been moving between $40 to $55 a barrel, this agreement is expected to stabilize prices above the $50 benchmark into the foreseeable future.
Around the world, regional oil producers, especially in the U.S., are expected to start ramping up exploration and drilling efforts if oil settles above $50 a barrel. For high-cost oil producers, a target amount of $55 to $60 a barrel is where the market would need to go before they would be able to jump into the fray.
These cuts would appear to be temporary by nature due in large part to exemptions given to Libya and Nigeria, allowing them to increase production in order to offset issues related to significant supply outages caused by internal conflicts. Iran has agreed to freeze at current production levels, another concession granted as the country continues to stabilize its economy in the aftermath of the release of U.S. sanctions.