OPEC succeeded in pulling off what many thought was impossible, overcoming mutual disdain and mistrust to reach a deal on reducing its oil output. Oil prices skyrocketed on the news, up more than 12 per cent since the agreement was announced last week. But what if there is much less to the deal than meets the eye? What if OPEC does not actually follow through on the promised production cuts?
Several days of strong price gains ran into a wall of skepticism on Tuesday, after fresh data showed that OPEC’s November production was much higher than anticipated. The cartel’s output jumped from 33.6-33.8 million barrels per day (mb/d) in October to a record high 34.19 mb/d in November. The gains came from Angola, Gabon, Indonesia, Libya, Nigeria, Iran and Iraq.
If OPEC is to succeed in bringing production down to its stated target of 32.5 mb/d by January, it will now need to cut 1.7 mb/d, not just the 1.2 mb/d that it announced last week. But a few of those countries (Libya, Nigeria, Indonesia) are exempted from the limits agreed upon in the latest deal. That means that the rest of OPEC will need to shoulder steeper cuts if the cartel is to hit the 32.5 mb/d threshold. However, the group did not discuss this contingency – who should cut even deeper – so there is little reason to think that any individual member will voluntarily cut more than they agreed to just so that the collective output comes in lower.