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After the OPEC Decision, What's Next?

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After the OPEC Decision, What's Next?

OPEC's Nov. 30 agreement to cut production caught the oil market and traders by surprise. But will it really bring equilibrium to an oversupplied market? And what will it mean for prices? Will OPEC members benefit economically? And does the decision ironically throw North American shale-oil producers a life line?

To say the OPEC agreement was a surprise is an understatement. Markets were skeptical that the big three--Iran, Saudi Arabia, and Iraq--would be able to overcome their disagreements and reach any type of accord. Ultimately, what allowed the cartel to complete the deal was Saudi Arabia's decision to relent on its insistence that Iran be subject to production cuts.

To recap, on Nov. 30, OPEC members agreed to cut production by 1.2 million barrels per day (bpd) to 32.7 million bpd effective Jan. 1, 2017, and lasting through the first half of 2017. On Dec. 10, another bit of unexpected news was announced: Certain non-OPEC members agreed to cut 600,000 bpd of their production including Russia, which pledged to slash its output by 300,000 bpd. This was the first production cut by OPEC in over eight years and the 1.2 million bpd was at the upper end of the range OPEC announced back in September, when it had struck a preliminary accord to establish a production band between 32.5 million bpd and 33.4 million bpd (table 1 provides a summary of the OPEC countries involved in the agreement and the reduction it requires each one to make).