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OPEC reaches agreement – US producers pleased

The unanimous decision of OPEC members to reduce the production level by 0.5 – 1.0 million barrels a day (mbd) was a relative surprise for the market.

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As a result, the price of Brent crude peaked from 46.50 USD/bbl to 50.40 USD/bbl. Since then, the price is trading around the 50 USD/bbl level. It seems that the market is skeptical whether this non-binding decision will be confirmed at the official OPEC meeting on November 30. It still remains unclear how such a reduction could be carried out at all. Admittedly, Saudi Arabia has offered to reduce production from, most recently, 10.6 mbd to 10.2 mbd, but only on the condition that Iran will not increase its current production level of 3.6mbd any further. However, Iran‘s oil minister reiterated that a production level of at least 4 mbd has to be reached. It will also be difficult to convince Venezuela, which had to reduce its capacities in the past due to lack of investments, of the relevance of such a deal. In addition, countries such as Nigeria and Libya would need to be given exclusive rights to increase the capacities again once the internal crises are over.

Therefore, there is still a lot of work to be done, and some barriers to be overcome before a coordinated control over the production level can be agreed on. However, what is to be regarded positively is the general willingness of the OPEC members to enter into dialogue and the recognition that an oversupply of the market is counterproductive to all. One party that will be particularly pleased with this decision is the oil industry in the USA since the agreement will stabilize the prices at least at current levels. My assessment from the article ‚Crude oil – fracking caps the price potential‘, published on August 25, remains unchanged. US oil producers will cap the price potential at 60 USD/bbl and, until then, some switches will have to be flipped within OPEC.

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