Saudi Arabia: Oil prices rebound strongly following November's production cut deal

Oil prices rebounded strongly following the 30 November agreement to reduce crude supply by around 1.3 million barrels per day (mbpd). The Organization of the Petroleum Exporting Countries’ (OPEC) oil basket hit a one-and-a-half-year high on 29 December and traded at USD 53.5 per barrel, an increase of 21.9% from the same day in November and an astonishing 71.0% recovery from the start of 2016.

The announcement of the first oil production cut agreement in eight years came as a surprise as many market analysts expected political rivalry between Iran and Saudi Arabia to cause a deadlock. OPEC members decided to implement a combined production target of 32.5 mbpd, effective from 1st January 2017 for six months (with a possible extension for a further six), which represents a significant reduction from the record 33.87 mbpd extraction in November. The lion’s share of the oil cut is expected to come from the Gulf Cooperation Council countries, chiefly Saudi Arabia and the United Arab Emirates, and Iraq. Iran’s oil production quota will be broadly in line with its current extraction level as the country recovers from sanctions. In addition, on 10 December, a group of non-OPEC countries led by Russia decided to join the deal by reducing output by an additional 558,000 mbpd, also starting in January 2017. Despite the deal, a tough road lies ahead given OPEC countries’ poor track record in sticking to their quotas, a challenging global economic environment and weak public finances in some oil-producing countries.

OPEC countries continued to pump oil at a record pace ahead of the planned 30 November oil deal. According to the latest OPEC Monthly Oil Market Report, November’s increase in combined output to 33.87 mbpd, from 33.72 mbpd in October, mainly reflected a boost in production in Angola, Libya, Nigeria and, to a lesser extent, in Venezuela. Conversely, Kuwait, Saudi Arabia and the United Arab Emirates recorded a significant reduction in crude production in the same month. Saudi Arabia produced 10.51 mbpd in November, which was below the 10.56 recorded in the previous month.

FocusEconomics Consensus Forecast panelists expect oil production in Saudi Arabia to average 10.39 mbpd this year. In 2018, our panel of analysts sees crude output remaining broadly stable at 10.52 mbpd.