Yesterday I wrote that the financial markets’ reaction to whatever came out of OPEC’s meeting today would depend on how weak or strong the agreement to cut production was.
Well, the actual agreement announced today to cut oil production was far stronger than expected. That surprise sent oil markets soaring today with U.S. benchmark West Texas Intermediate up 8.34% to $49.00 a barrel. The Brent benchmark rose 8.82% to $50.47 a barrel.
It wasn’t the size of the cut that was surprising: The agreement would reduce output by about 1.2 million barrels a day in January. That matches the September pledge to cut OPEC production to 32.5 million barrels a day.
The surprise, actually, was that the agreement had solid details about which OPEC members would cut production by how much and that non-OPEC producer Russia has agreed to cut its production by as much as 300,000 barrels a day “conditional on its technical abilities.” (Whatever that means, it does give the Russians plenty of wiggle room. OPEC will hold talks with non-OPEC producers next week.)
The agreement grants exemptions from the cuts to only Nigeria and Libya. Both Iran and Iraq had been demanding to be granted exemptions from the cuts as well. Iran, however, would be allowed to increase its output to 2.8 million barrels a day. Saudi Arabia had argued that Iran should be limited to producing 3.707 million barrels a day.
The Saudis will cut production by 486,000 barrels a day to 10.058 million barrels a day. Iran had argued for Saudi Arabia to cut production by 1 million barrels a day.
Iraq, the second largest OPEC producer, will cut production by 210,000 barrels a day.
The United Arab Emirates and Kuwait will reduce output by 139,000 barrels a day and 131,000 barrels a day, respectively.
News of the OPEC agreement came today as the U.S. Energy Information Administration reported that U.S. crude production rose to 8.7 million barrels a day last week from 8.69 million in the prior week. This week’s production rate is the highest since the week ended June 10.