What Does OPEC’s Historic Cut Mean for Oil Stock Investors?

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Canadian oil stock investors should not underestimate how bullish this is for oil stocks—not only does the agreement mean up to 1.8 million barrels of production per day will be removed, but it also means that OPEC is back to market manipulation, ending the free-market model that was partially to blame for the oil rout and putting a firm floor under oil prices.

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What was the deal? The deal featured a few significant accomplishments. Overall, OPEC producers agreed to cut production from 33.7 million bpd to 32.5 million bpd—a cut of 1.2 million barrels per day. In addition, non-OPEC producers are expected to contribute another 600,000 bpd to the cut (half from Russia), bringing the total to 1.8 million bpd. These details will be fleshed out more next week.

Where did the cuts come from? The bulk comes from reliable states with a history of sticking to cuts. Saudi Arabia will cut 486,000 bpd, and the UAE, Qatar, and Kuwait will cut another 300,000 bpd. Iraq also agreed to cut 210,000 bpd. This is significant, since this would be decades since Iraq actually agreed to an OPEC cut.

Of course, many cite the fact that Iran, Libya, and Nigeria were basically exempted from the deal, but even if Libya and Nigeria restored their production and Iran was allowed to add 90,000 bpd of production (an unlikely situation), OPEC would still see a nearly 600,000 bpd supply cut, not including any non-OPEC producers.

Will OPEC stick to the agreement?

One of the big concerns surrounding OPEC agreements is that producers will not comply fully. To enforce the agreement, OPEC is setting up a committee comprised of three smaller OPEC producers as well as two non-OPEC producers. This should help to ensure compliance, but it is important to note that there are better reasons to be optimistic about compliance.

As mentioned earlier, the bulk of the cuts is coming from Saudi Arabia and its Gulf State allies, all nations which have a solid previous track record of sticking to cuts. During the economic crisis cut back in 2009, Saudi Arabia, Kuwait, Qatar, and the UAE all stuck to cuts.

Other OPEC producers (including Iraq) had a less favourable track record, but it is important to note that nearly all OPEC producers complied during the dot-com bust cut. It is also important to note that OPEC producers like Iraq can’t simply hike production rapidly, unlike other periods in history.

Read the full article at: www.fool.ca