In a surprise move, OPEC members agreed to cut oil production at its meeting Wednesday in Algeria. Ecuador, which had pushed for a larger reduction, said it was pleased with the decision and said higher oil prices will benefit its struggling economy.
OPEC’s decision means that member nations will reduce production from a current level of 33.4 million barrels a day to 32.5.
Ecuador’s René Ortiz, former general secretary of OPEC, said that the reduction, even though it small, will have an immediate impact on the market. “The consensus among traders was that prices would average between $55 to $60 in 2017,” he said. “Wednesday’s decision raises the average to $60 to $70. More importantly, it signals that OPEC is open to more production limits to support prices.”
Following the OPEC announcement Wednesday, oil prices jumped 5% to $47 a barrel.
In the past, Saudi Arabia has been the stumbling block for cutting oil production, ignoring requests from Ecuador, Nigeria, Venezuela and other countries. Like Ortiz, Mohammed Bin Saleh Al-Sada, Qatar’s energy minister, said the reduction is a message to the world that OPEC is concerned about the oil market. “This is a small step but sends a message that we will support the market and keep it healthy.”
A Goldman Sachs oil analyst said after the OPEC meeting that another factor could drive oil prices higher: Thursday’s override of U.S. President Barack Obama’s veto of legislation that will allow U.S. citizens to sue Saudi Arabia for 9/11 losses. Earlier, the Saudi government said it might retaliate by withholding oil shipments to the U.S. if the legislation became law. Although the U.S. is technically oil independent, much of its recent production requires prices of $75 to $80 to be profitable.