After seesawing for a few days following the OPEC output cut deal on November 30, oil prices recently surged to the highest level since July 2015, after the cartel’s bigwig Saudi Arabia indicated that it will reduce production by more-than-previously indicated. Also, OPEC and non-OPEC producers including Russia on December 10 cut their first deal since 2001 to reduce output next year which in turn led to the spurt in prices.

Both WTI and Brent crude futures rose over 5% in Asian trading following the news. On Saturday, non-OPEC producers vowed to reduce “output by 558,000 bpd, short of the initial target of 600,000 bpd but still the largest-ever contribution by non-OPEC countries.”

Investors should note that on November 30, OPEC decided to slash production. The apparent hurdles to the deal – Iran and Iraq – also came in tune with others and decided to cut output about 1.2 million barrels a day by January to about 32.5 million barrels for six months.The OPEC and non-OPEC pact will result in “an aggregate supply cut of 1.7 million barrels a day.”

As per Saudi Arabia, the OPEC and non-OPEC pact accounts for countries that produce 60% of the world’s oil output but does not include major producers like the U.S., China, Canada, Norway and Brazil.

How Effective Will the Pact be for Oil Patch?

As per Saudi Arabia, “assuming reasonable compliance levels, these cuts will be enough to push the market into deficit” and lead to $60/bbl Brent crude price in the near term, especially with the commodity already hovering around $55/bbl.

The analyst expects 0.8Mbpd deficit in the oil patch in 1H17 on the OPEC and non-OPEC decision. If tightening in supplies continues into the second half of 2017, the deficit could amount to over 1.5Mbpd. This is especially true given 96.3 million barrels of oil in global demand per day this year which is expected to increase further by another 1.2 million barrels a day in 2017.

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