VIENNA — After years of trying fruitlessly to prop up energy markets, OPEC on Wednesday finally reached a consensus on production cuts, sending oil prices soaring. The problem is, the euphoria in the markets may not last.
With prices still at less than half the levels of two years ago, the Organization of the Petroleum Exporting Countries agreed this fall to lower collective production. But it could not figure out how to spread the cuts among the countries.
The path to consensus has been complicated by Saudi Arabia and Iran, whose longstanding mutual enmity encompasses religious, political and economic competition. When it comes to oil, Saudi Arabia, OPEC’s top producer, has fought to maintain its market share, while Iran has worked to protect its nascent comeback as a power broker in the cartel, a role it lost in recent years under Western sanctions tied to its nuclear program.
They overcame their differences on Wednesday, with OPEC deciding to cut production next year by about 4.5 percent, or 1.2 million barrels a day. It will be the first cut in eight years.
With the prospect of less pumping, oil prices, which began rising earlier in the day in anticipation of the deal, were up more than 8 percent, to nearly $50 a barrel. Rising prices could lift the troubled economies of oil-dependent nations like Nigeria and Venezuela, and bolster the fortunes of smaller American energy producers that have been shaken by the weakness.
The deal shows that “the weight and resilience of OPEC is still there and will continue to be,” Qatar’s energy minister, Mohammed bin Saleh al-Sada, said at a news conference on Wednesday.
The market optimism, though, may soon be tempered.
The deal, which is to last six months starting in January, is contingent on the cooperation of non-OPEC countries, most notably Russia. While Russia agreed to participate, Moscow is notoriously difficult to predict. And its reported 300,000 barrels-per-day cut is only a trickle in its total output.
A recent production frenzy creates another wild card for the deal.
While Saudi Arabia and Iran have vocally supported higher prices, their national oil companies have been making deals in Asia and filling tankers as quickly as possible. Saudi production has increased to well over 10 million barrels a day, while reductions in domestic consumption have left more available for export. Iran, relieved of nuclear sanctions, has gone on its own selling spree in India and started production in new oil and gas fields.
Other OPEC countries have followed, increasing production in recent months. The race to pump more is taking several of the cartel’s largest members to the brink of their production capacity.
The intense competition makes OPEC’s new plan less meaningful — part of the piece of the industry dynamics that means the price increase could prove temporary.
The size of the cut is fairly trivial in a 96-million-barrel-a-day marketplace that remains oversupplied. Should prices rise in the next few weeks, American shale producers are very likely to drill and complete more wells, which would add supply to the global market. And if history is any guide, even a modest agreement can be breached by cheating.
“If higher prices bring higher output, prices will not remain up for long,” said Jim Krane, a Middle East energy analyst at Rice University. “It won’t be long before we’re back where we started.” (The New York Times).
After the agreement to the deal, OPEC as formed a new team of members in order to ensure that the agreement is to be implemented as planned, this team is to be headed by Kuwait along with two other OPEC members which are Venezuela and Algeria from within the organization and two Non-OPEC members to be announced after their next meeting.