The skeptics had it wrong! Saudi Arabia and Russia secured what the Saudi oil minister says correctly is a “historic deal” with non-OPEC nations. This deal can only be described as a major diplomatic achievement and was done despite long odds. Not only was Saudi Arabia and the Saudi oil minister Khalid Al-Falih able to put aside their animosity with Iran, they were also able to get Iran to commit to a ceiling on its output. Russia and Vladimir Putin helped orchestrate a deal with non-OPEC nations for the first time, adding to OPEC’s 1.2 million barrel a day cut. 

Because of Russia’s success sealing the deal with non-OPEC nations, the Saudi oil minister put the icing on the cake by saying, “I can tell you with absolute certainty that effective Jan. 1 we’re going to cut and cut substantially to be below the level that we have committed to on Nov. 30. If the market demands it, we are ready reduce our output under 10 million barrels a day.”

Despite the skeptics, I predicted this outcome all along even as the negotiations had its series of ups and downs. I believed strongly that the deal to cut output would happen because the time was right. Two years ago on Thanksgiving, the last OPEC deal fell apart when then OPEC Secretary ALI Naimi could not get a firm commitment from Russia and Iran to cut production and a production war was declared. The Saudis hoped to drive shale producers out of business and at the same time, price some sense into other non-OPEC and OPEC producers. The move was not a total victory over the shale producers but it was enough to force many of them into bankruptcy and slow the meteoric rise of US output. And while it is possible that the OPEC move will help the shale producers rise output next year, OPEC and non-OPEC have enough of a lead with market share that it would not be a threat, at least over the next few years.

We did see U.S. rig operators already respond in part because of higher prices and year end lease obligations. Baker Hughes reported that the U.S. oil rig count increased by 21 rigs to 498, the biggest increase since July, 2015. They also reported an increase of 6 gas rigs to 125. The increased drilling may slow a bit in the new year but the OPEC move may loosen up some more appetite for investments.