Markets may be welcoming the OPEC deal but motorists will feel the pinch at the pumps shortly. Oil rose to its highest price today as OPEC agree to cut production for the first time since 2008.
Russia work with OPEC
The deal was dependent on Russia agreeing with OPEC, they agreed but said they would have to have a gradual come down in production. Indonesia suspended its membership of OPEC based on this, as they currently import more than they export, keeping crude oil at as low a price as possible is in their national interest.
With the rise of $2 to $54, industry experts are saying that OPEC has now put a floor on $50 a barrel prices.
This means that next year we can expect to see prices of $55-$60 a barrel. This means however that in the UK we can expect a price increase of up to 9p a litre.
Saudi Arabia cut production
The main reason for this lowering in production was that Saudi Arabia agreed to cut production. They had raised production to a high level so as to flood the market, with the intent of driving the US shale oil companies out of business. This effective capitulation helped to drive the price of crude up; as such, they are taking the largest cut in output.
OPEC have tried to arrange an output cutting agreement for most of 2016 but all the previous meetings have fallen apart. As OPEC now accounts for less than half the oil produced in the world, they had to try and prove they are as important now as they were in the 1970's.
This caused a flurry of trading in the futures market as the market re-adjusted their contracts for February and March 2017. This is because the new lower January output will be evident by then.
Caution is warned
Many in the markets though are advising caution, they think the market is featuring high trading in the futures market as a non-thinking reaction to the fact that OPEC has worked in a co-ordinated fashion, for the first time in nearly a decade.
They warn that the deal will fall apart or that Russia will just pump more gas and the long-run marginal cost of shale will keep falling.
So at the minute, this restructuring is good for the markets but in the long run, as OPEC's members do not have a great track record of actually sticking to production quotas, we could see some cheating and a reversal of the oil price again.
