To the surprise of many market watchers, OPEC has agreed to reduce its oil output to 32.5 million bpd from the current production levels of around 33.24 million bpd (roughly a 1.0 million bpd cut in production). OPEC members plan to set up a committee to decide over the next two months the individual supply cuts for each member country. So what exactly motivated Saudi Arabia to suddenly abandon its strategy of producing at record levels to weed out high cost producers around the world (i.e. U.S. shale producers). First and foremost, Saudi Arabia's economy has been suffering tremendously under the strain of low oil prices. Specifically, the country's foreign exchange reserves have fallen nearly 20% over the last two years, to $587 billion through March 2016. Saudi Arabia also recently said that it would cut ministers' pay by ~20% and pare perks for public sector employees, who make up two-thirds of the country's workforce. It is very evident that if Saudi Arabia continued down the path of keeping oil prices low, the country could have undoubtedly risked civil unrest as government services and perks continued to be cut.
Other interesting takeaway's from OPEC's decision to cut production, is that Saudi Arabia appears to be returning to a period of market management (i.e. controlling oil prices). Only a short time ago, market watchers had pronounced the death of OPEC, which now appears to be premature. Secondly, OPEC's decision to cut production also suggests that Saudi Arabia and Iran, with the mediation of Russia, Algeria and Qatar, were able to overcome the differences that derailed previous proposals. This likely suggests that we will now see better cooperation between OPEC members going forward. Overall, OPEC's decision to cut production (provided that member countries abide by their new quotas) is very positive for the oil markets, as well as energy companies globally.
A Canadian Energy expert