How would OPEC production cut affect fuel prices?

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Bengaluru, Dec 1 The Organisation of the Petroleum Exporting Countries (OPEC) on Wednesday approved the first supply cuts in eight years. The aim is to ease record surplus and stabilise global markets.


Iranian Oil Minister Bijan Namdar Zanganeh in Vienna said that OPEC has agreed to reduce collective production to 32.5 million barrels a day. He also informed that OPEC will continue with producing 32.5 million barrels a day for six months starting 2017.


Negotiations to cut down the supply was not easy for OPEC members as when the production cut was first proposed in Algeris in September, investors were worried if an accord could ever be signed.

Right till the agreement was done major obstacles were threatening the signing of the agreement. Tense negotiations for months resulted in three largest oil producing countries - Saudi Arabia, Iraq and Iran - resolving their differences and agreeing to share the burden of the production cuts.

Saudi Arabia had in the past asked to be given special consideration when it comes to production cut as it needed funds to carry on offensive against Islamic State.
Indonesia had asked that its membership be suspended and it didn't want to be party to the production cuts. Indonesia is a net importer.

What plans OPEC has?

OPEC plans to hold talks with non-OPEC nations who produce oil and ask for production cut. Russia is also set to cut oil production by 300,000 barrels per day during the first six months of 2017. Russian Energy Minister Alexander Novak held told reporters in Moscow.

What to expect of the production cut?

The price rise is going to be natural outcome of the oil production cut by the OPEC countries. But how much the price rises will depend on two things. First being how well the OPEC nations comply with the agreement. Second being how much the US oil producers fill up the gap left by the OPEC production cut.

US oil producers are making merry since last two years thanks to higher oil prices and lower drilling costs. Many experts believe that OPEC would want oil price to be between $50 and $60 per barrel as any price above it would mean US oil producers will step up the production which would hurt the interests of OPEC.

About OPEC:

OPEC is a permanent, intergovernmental Organisation which aims to co-ordinate and unify petroleum policies among its member countries to secure fair and stable prices for petroleum producers.

OPEC also aims an efficient, economic and regular supply of petroleum to consumer nations. OPEC also aims at providing a fair return on capital to investors in the petroleum industry.

OPEC originally had five member nations: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Nine other nations joined OPEC later. The countries who joined OPEC later are: Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador, Angola, Gabon
OPEC has its headquarters in Vienna, Austria, since September 1, 1965.

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