In a bid to allay fears of global oversupply, the Organisation of the Petroleum Exporting Countries (OPEC) has agreed to cut oil production after 14 major oil exporting member nations came to an agreement on Wednesday. As per reports, the world's largest energy cartel has decided that output should be reduced to a range of 32.5-33.0 million barrels per day—a drop of almost 700,000 barrels per day. However, the finer nuances of the agreement will be finalised in November. Among the nuances that are yet to thrashed out, member nations will decide on how much each country would produce at the next OPEC meeting in November, where invitation for joint cuts will also be extended to Russia, reported Reuters. The markets have responded to the deal in kind. Brent crude rose 2 percent on Thursday to just over $49.64 a barrel and has gained almost 8 percent since the agreement was announced, reported The Guardian. Amidst mounting pressure from low oil prices, the cartel’s leading figure Saudi Arabia decided to give its regional arch-rival Iran some leeway.
As per the deal, Iran, Nigeria, and Libya would be allowed to increase production. Prior to this deal, OPEC nations had been producing at record levels, as members sought to firm their grip on the market, following the entry of US-produced shale oil. However, the oversupply resulted in a massive fall in oil prices from $110 per barrel to $40 barrel this year. Experts contend that oil prices are well below the budget requirement of most OPEC nations. Earlier attempts to cut production failed because of disagreements between Iran and Saudi Arabia. In the past, Riyadh had said that it would reduce output to ease a global glut only if other member nations committed to the same. Although both nations heavily depend on oil, Iran has suffered a lot less from the drastic fall in prices since it was denied access to the global market by Western-backed sanctions prior to the historic Iran-US nuclear deal last year. But rising unemployment and slow economic recovery have forced Iran President Hassan Rouhani to seek maximisation of oil revenues. Meanwhile, Riyadh’s decision to change tack comes amidst reports of a stagnating domestic economy. The Gulf giant faces a second year of major budget deficits after a record deficit of $98 billion last year. Economic compulsions have come in the way of political hostilities between the two nations, which are fighting several proxy wars in the Middle East. Syria and Yemen are the biggest theatres of their proxy wars.
What are the implications of the OPEC deal for India? As the fourth largest importer of crude oil, India imports 85 percent of total oil and 95 percent of natural gas from OPEC nations. The drop in India's inflation levels has been largely down to the huge slump in crude oil prices. As a major importer, India has been a key beneficiary. At present, India incurs a massive Rs. 4.5 lakh crore on crude imports. Although experts contend that oil prices will not return to the highs of $100 per barrel, the Centre cannot function under the presumption that prices will remain low in the long-term. Earlier this month, Russia and Saudi Arabia agreed to plug the global glut and raise prices. But neither nation went into the specifics of how they would achieve their goal. Previous attempts by the OPEC to force a rise in prices did not yield much success due to the production of American shale oil. But the potential for a production freeze, which could jack up prices, remains a serious possibility in the near future.