Why should you care about the OPEC accord?

 

The past six weeks have seen both OPEC and non-OPEC oil producing nations agree to cut their crude output by 1.2million barrels per day. The following article asks what that really means and why it is something you should be aware of.

 

What is going on here?

In the last six weeks both OPEC and non-OPEC oil producing nations have agreed to cut their crude output. The OPEC accord was the first such agreement in eight years, with the 1.2 million barrels per day reduction in output to begin in January 2017 and to last six months. There is an option to extend the agreement to the end of the year. Eleven oil producing countries that are not part of OPEC also reached an agreement to reduce output; Russia along with ten others countries will cut production by 0.6 million barrels per day.

What does it mean?

The price of oil experienced a sharp decline from 2014 until the middle of January 2016, as record levels from US shale oil producers led to an oversupplied market. OPEC refused to cut supply as it sought to defend its market share and put pressure on the higher cost US shale oil producers. However, with supply reductions now beginning to impact markets, OPEC nations eventually reached a deal to support prices by lowering its output, sending brent crude futures up by more than 20% since the announcement on 30th November.

What to take away from it?

It goes without saying that the fortunes of oil producing companies are closely linked to the price of crude and will benefit from a rise in prices. Additionally oil based products such as gasoline represent a significant cost for a number of companies including those in the transportation or airline sectors, and therefore its price can impact their profitability. Fuel prices are also a significant component in various measures of inflation. With the 2014 – 2016 decline in the price of crude now largely outside of year-on-year inflation comparisons, last year’s rally will begin to show up in inflation data over the coming months.