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In the early hours of last Saturday, OPEC member states and non-OPEC oil-producing countries reached a joint production reduction agreement in Vienna to alleviate global supply glut. This is the first joint production reduction agreement reached in years. The market expects that compliance will be good in the early stage and oil prices will rebound.
A joint production reduction agreement was reached
OPEC member states and non-OPEC countries attending this meeting accounted for 50% of global production. In addition to Russia, Azerbaijan, Bahrain, Bolivia, Brunei and other non-OPEC oil-producing countries attended production reduction meetings or issued production reduction statements. Non-OPEC oil-producing countries agreed to reduce production by 10,000 barrels per day in line with OPEC's production reduction actions. This is slightly lower than the original target of 10,000 barrels per day, but it is still the largest contribution made by non-OPEC countries to production reductions in the past years.
Russian Energy Minister Novak said that by the end of the first quarter of this year, Russia will reduce production by 10,000 barrels per day, and the monthly production reduction will reach 10,000 barrels per day. Oman said it would cut production by 10,000 barrels per day, and Kazakhstan said it would strive to reduce production by 10,000 barrels per day next year.
Two weeks ago, OPEC countries reached the first production reduction agreement in 2019, agreeing to cut production by 10,000 barrels per day. Saudi Arabia, the top oil producer, cut production by as much as 10,000 barrels per day, which helped oil prices rise by 10%. According to Bloomberg, Saudi Oil Minister Farah said after the Vienna meeting on Saturday that Saudi Arabia may cut more production.
Farah evaluated this production reduction agreement as "historic" and "building consensus." Reuters believes that this hard-won agreement has overcome nearly a year of internal quarrels within OPEC and doubts about the willingness of non-OPEC oil producer Russia to reduce production. Years ago, Russia failed to fulfill its commitment to reduce production in sync with OPEC, but this time the production reduction is expected to be real.
Oil prices may rise in the short term
In the past two years, low oil prices have tortured many countries, making their finances unable to make ends meet and even deepening the country's turmoil. Now the production reduction agreement reached within OPEC countries and the joint production reduction with non-OPEC oil-producing countries have brought hope to the oil market, and also made people pay more attention to whether the agreement will be strictly implemented.
According to Reuters, non-OPEC member Kazakhstan has promised to moderately reduce production by 10,000 barrels per day under diplomatic pressure, but it is not clear at what level the country will start to reduce production. It is not clear whether the production cuts by non-OPEC countries such as Mexico are a natural decline in production or a real production reduction, so it is inevitable to cast doubt on the agreement.
Analysts at research firm OPEC said the agreement was undoubtedly remarkable given the unrestricted production increases in previous months. But it may still be difficult to precisely control output from individual oil-producing countries. And few countries can show the willingness to reduce production or cooperate like Russia. Therefore, oil prices will rise in the short term after reaching a joint production reduction, and at the same time, be wary of illusions caused by over-optimism.
Forbes website reported that OPEC has a bad record of manipulating production quotas. This time, Nigeria and Libya were excluded from the production reduction agreement due to internal unrest that affected oil production, which further increased pressure on Saudi Arabia. Limiting production in the common interest, when everyone else is honest and one of them cheats, would make OPEC extremely unstable.
&The production reduction agreement reached this time may bring short-term success, especially in affecting market sentiment, thereby supporting oil prices in the short term, but it will eventually succumb to oil-producing countries increasing production. & market research company chairman wrote in a report.