VOLUME XLII NO.12
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“Russia and 10 Other Non-OPEC States Will Reduce Their Production by More Than Half a Million bpd”
To Achieve Oil Market Stability
Eleven countries agreed on December 10 to cut their oil output, teaming up with the OPEC (Organization of the Petroleum Exporting Countries) cartel in an exceptional bid to end the world's glut of crude and reverse a dramatic fall in income. Russia and 10 other non-OPEC states will reduce their production by more than half a million barrels per day (bpd), OPEC announced.
Eleven countries agreed on December 10 to cut their oil output, teaming up with the OPEC (Organization of the Petroleum Exporting Countries) cartel in an exceptional bid to end the world's glut of crude and reverse a dramatic fall in income. Russia and 10 other non-OPEC states will reduce their production by more than half a million barrels per day (bpd), OPEC announced.
The deal will take effect in the beginning of 2017 and last for six months, though it may be extended depending on market conditions.
"I am happy to announce that a historic agreement has been reached," said Qatar's Energy Minister Mohammed Bin Saleh Al- Sada, whose country holds the OPEC rotating presidency of the OPEC.
The cut will contribute to OPEC's own initiative to ease a saturated market and end a price slump that has brutally affected the economies of many oil producers. On Nov. 30, 2016, Wednesday, its members announced a slash in output by 1.2 million bpd beginning in January, to 32.5 million bpd. Under that deal, OPEC sought for non-member producer states to lower their output by 600,000 bpd. Saturday's deal approves cuts totaling 558,000 bpd.
Russia had already signaled it would provide half of that production cut in the first half of 2017.
The other countries which will contribute cuts are Mexico, Kazakhstan, Malaysia, Oman, Azerbaijan, Bahrain, Equatorial Guinea, Sudan, South Sudan and Brunei.
Will oil producers' cut have lasting impact?, said a headline of media. It seems like a big deal. But the joint production cut from OPEC and non-OPEC countries - the first in 15 years - might push up the price of oil less than the nations involved are banking on. At over US$50 a barrel, oil prices remained buoyant and well above recent norms on Dec. 12, 2016, Monday, reflecting the cutbacks to production agreed to this weekend - and with reason.
Less than two weeks after members of the OPEC agreed to pare 1.2 million barrels a day of their production, they were joined by nearly a dozen outsiders, on December 10, who pledged an addition daily 558,000-barrel cut, according to the foreign news from Vienna.
On December 12, the price of U.S. benchmark crude rose US$1.33 (2.6%), to settle at US$52.83 per barrel in New York. The price of Brent crude, the international standard, rose US$1.36 (2.5%), to finish at US$55.69 a barrel in London.
President-elect Donald Trump has promised to free up more oil drilling in the United States which would increase global supply. More U.S. shale oil, which was unprofitable to produce at the price lows around US$35 a barrel touched earlier this year, could become viable again, further increasing supply.

Past OPEC attempts to reduce output and push prices upward have failed due to members pumping above their quotas. That contributed to the worldwide glut that combined with feeble economies of consuming countries to bring down prices to as low as US$35 early this year. And outside OPEC, some of the cutbacks will be difficult to verify, leaving no choice but to take the word of the country involved that it is fulfilling its pledge.
Russia has said it will cut daily output by 300,000 barrels. But it plans to dribble out its share of the reduction over the coming months and JBC Energy said in a research note that the strategy will translate into a drop of only 80,000 Russian barrels for the first half of next year.
So, while prices are up, hopes may soon be down for the 22 nations involved that their deal will result in a return to sustained high prices ? and some analysts are hedging their bets.
"Historic agreement or historic bluff?" asked Commerzbank in its note Monday. In a statement following the meeting, OPEC said the other oil giants were working "to achieve oil market stability in the interest of all oil producers and consumers." A monitoring committee, comprising three OPEC and two non- OPEC members, will now be set up. Sada said OPEC would continue its efforts to persuade non-OPEC producers to join the reduction effort.
Oil prices had climbed on December 9 as hopes grew of a deal. In late European business, West Texas Intermediate (WTI) crude stood at US$51.44, 60 cents up on the day, while Brent rose 20 cents to US$54.09.
The November agreement ended weeks of uncertainty and volatility on crude markets, pushing prices above US$50 for the first time in a month. It also represented a dramatic reversal from OPEC's Saudiled game plan, introduced in 2014, of flooding the market to force out rivals, in particular US shale oil producers.
OPEC produces around 40% of the world's crude and thus needed non-OPEC members to join the cuts to drain current stockpiles. But Bloomberg calculations, based on OPEC data, indicated there would be little overall reduction in record oil inventories in 2017 - even if OPEC could convince non-members to come on board.
After weeks of often-tense negotiations, the group's three biggest producers - Saudi Arabia, Iraq and Iran - resolved differences over sharing the burden of cuts, according to the foreign news from Vinena on November 30.
Breaking with years of inaction, OPEC agreed on Novemer 30 to cut its oil output for the first time since 2008. The move effectively scraps its strategy of squeezing U.S. competition through high supply that had backfired by lowering prices and draining the cartel's own economies.
The reduction of 1.2 million barrels a day is significant, leaving OPEC's daily output at 32.5 million barrels. And OPEC President Mohammed Bin Saleh Al-Sada said non-OPEC nations are expected to pare an additional 600,000 barrels a day off their production.
Al-Sada said the OPEC cutback is to take effect January 1, with consultations planned on the exact timing of the non- OPEC reductions. Russia alone is committed to taking 300,000 barrels a day off the market. With the production cut, OPEC will not only benefit from gaining more dollars per barrel. It can also lay claim once again to playing a part in influencing world prices.
The decision on November 30 was a departure from years of infighting among members refusing to give up their market share and a resulting series of inconclusive meetings. In another reflection of newfound discipline within the cartel, Al-Sada said Indonesia's membership had been suspended after it refused to accept its share of proposed output cuts, reducing the number of OPEC countries to 13.
Part of the focus following on November 30 decision is how well it holds. OPEC gave up assigning quotas in part because members have ignored them in their quest for petrodollars. But officials were displaying new confidence. In comments addressed to nay-sayers about his organization's relevance, Al-Sada said its decision "means the weight of OPEC and the resiliency of OPEC is still there and it will continue to be there."

South Korea has seen gasoline prices rise for 33 consecutive days to approach KRƒ 1,480 (US$1.22) a liter, marking the highest price in 13 months. The hike poses a big threat to the economy in 2017. Despite skepticism over the agreement by petroleum producers on an output cut, the nation should be vigilant over whether OPEC and some non-OPEC producers will really implement their promise to slash collective output by 1.8 million bpd, starting January 1.
Prices of international crude, such as Brent and Dubai, have shot up nearly 100% compared to the first quarter of this year, reaching the range of US$52-56 a barrel. Local economists are worried and the Bank of Korea picked the coming direction of oil prices as one of 10 major global economic issues next year.
The situation is quite contrary to the period between 2015 and early 2016, when policymakers were citing low crude prices - which dipped to US$25~27 a barrel in February - as one of the main barriers for economic vitalization. But the then-cheap crude was not a bane but boon to Korea: those could undoubtedly ease the cost burden of households and many industrial sectors.
Hyundai Research Institute and Korea Economic Research Institute projected 2.3% and 2.1% GDP growth, respectively, for next year. Their gloomy outlook reflects the weakening purchasing power of households.
The relative shortage in surplus funds is attributable to bank mortgages for apartment purchases over the past few years.
Higher gasoline prices and rising bank loan rates also pose threats to households. As for the corporate sector, air carriers and other industries heavily dependent on oil imports, their operations are susceptible to a spike in crude prices. In particular, a large proportion of small manufacturers might face higher costs.
The Park Geun-hye scandal means South Korea's control tower is as good as vacant in terms of drawing up countermeasures, leaving the economy vulnerable to external uncertainties.