Why OPEC Production Cuts Are Good News for America

Anthony Fensom

Economics, Middle East

OPEC has just delivered a major windfall to American industry.

OPEC may have just saved America’s energy revolution.

The oil cartel’s December 10 announcement that it had struck a landmark deal with Russia and other major non-OPEC oil producers to curb production sent prices soaring. Brent crude gained more than 4 percent to $56 a barrel and U.S. West Texas Intermediate climbed to nearly $54 after the first global production cut in fifteen years between countries accounting for roughly 60 percent of global output.

The deal, which pledged to curb production by 558 thousand barrels a day, followed an agreement made two weeks earlier between OPEC members to slash 1.2 million barrels a day starting in January 2017.

Those involved hope the cuts will see the two-year long slump in crude prices finally come to an end, and with Brent crude reaching an 18-month high following the announcement, the agreement already appears to be working. Prices have doubled from their January 2016 floor, when resource markets were in a global funk.

Adding to the momentum was a comment from Saudi Arabia’s oil minister Khalid al-Falih: “I can tell you with absolute certainty that effective 1 January, we’re going to cut and cut substantially to be below the level that we have committed to on 30 November.”

Despite the prospect of higher production elsewhere, including from U.S. shale producers and other nations not party to the deal such as Brazil, Canada and China, analysts believe the days of cheap oil may be over.

“Make no mistake about it – this historic agreement is a game changer. Although the crude oil rally has already started at the end of last month when OPEC first announced the deal, I think there is plenty of fuel left in this rally,” Forex.com market analyst Fawad Razaqzada said.

ANZ Research’s senior commodity strategist, Daniel Hynes, said that should producers adhere to their pledges, the oil market would move into a substantial deficit in the first quarter of 2017, exceeding 1.5 million barrels per day (bpd), which could see prices top $60 per barrel.