Last week saw OPEC, a group comprised of the world’s largest oil producers, agree to cut the amount of oil they produce from January 2017. The agreement sets a production target of 32.5 million barrels per day which could equate to each member cutting their production by 1.2 million barrels per day.
At the beginning of 2014 world oil prices collapsed due to oversupply on the market, which resulted in a standoff between OPEC, Russia and the USA. In the past when the market became oversupplied OPEC would cut production to keep the price of oil high, however, due to the USA’s increased production of shale oil and Russia’s aggression in the market OPEC decided they didn’t want to lose market share to their competitors and opted to let the price of oil crash, at one point below $30 per barrel.
Another factor affecting the market was the lifting of sanctions on Iran, who had not been able to trade oil on the world market over the past two decades. OPECs leading member and the world’s largest oil producer Saudi Arabia had feared that if they were to make an oil production cut alone, Iran would fill the gap and eat into their market share.
Saudi Arabia had always said that a production cut would only come if Iran and Russia also agreed to cutting their production, which is what happened last week. It is still unclear what will happen with the US shale oil industry, but any increase in price could only benefit the industry.
The low oil prices have had a huge effect on the economies of oil producing nations including the large producers like Saudi Arabia and a production cut to support the market was always going to happen at some point. The real question was how long OPEC and Russia could wait before the effects on their economies would have serious political implications at home.
The price of wholesale gas and electricity can be closely associated with the price of oil and the collapse of the oil market at the beginning of 2014 resulted in an extremely bearish market until the beginning of 2016. Any increase in the price of oil will have an effect on the wholesale price of gas and electricity, therefore market analysts will be watching very closely what happens to the market over coming months.