Despite months of speculation that political differences between two large stakeholders, Iran and Saudi Arabia, would not let any sort of agreement to put a cap on their production levels, everyone came out highly surprised from the recent OPEC meet in Vienna on Wednesday as the powerful cartel agreed to production cuts, a move that saw crude oil prices soaring to more than 8%.
The world oil production would now be affected by around 1% as shale companies in the U.S saw their share prices rising astoundingly following the move.
The Organization of Petroleum Existing Countries agreed to bring down record production levels from its existing 33.6 million barrels per day by an astounding 1.2 million barrels of which surprisingly, Saudi Arabia will face the brunt of by cutting production levels by 486,000 barrels per day.
It was a move that was much awaited as the world crude prices plummeted to record lows that touched the mid $20s earlier this year as a supply glut loomed large over the oil dependent economies.
OPEC aims to rationalize prices to the mid-range of $55-$60 to stabilize its revenues. The glut strengthened due to political crisis and the situation in the Middle East as Saudi Arabia was adamant at growing production levels to gain a bigger market share but its policies saw the OPEC’s revenue fall from a high $920 billion in 2012 to predictions of its current year revenue earnings from crude to levels of around $341 billion, pushing the economies into free fall.
The main problem for the oil-rich kingdom was Iraq, who refused to cut down its production citing its war-like situation and engagement with IS as a reason for special treatment and Iran, who was adamant to increase its production to pre-sanction levels. The stance was ceded in favor of Iran who was allowed to increase output levels 3.8 million barrels, a move which could see its power brokerage growing in the influential cartel.
Outside the OPEC, Russia supported the cuts by also lowering down production levels by 300,000 barrels in a bid to stabilize crude prices around the world.
One of the biggest concerns which loom large over the success of this move was signs that higher prices could provide a rally to the beleaguered U.S shale production and see the market share of OPEC countries drop in the wake of subsiding demand and rising self-production sufficiency in Western oil demands.