BOFIT Viikkokatsaus / BOFIT Weekly 2018/50

Russia, OPEC and a few other oil-producing countries announced last Friday (Dec. 7) that they were cutting back crude oil production by a total of 1.2 million barrels a day from the start of 2019. OPEC members will reduce their production by a total of 800,000 barrels a day, while non-OPEC countries commit to cutting back by a total of 400,000 barrels a day. Soon after the agreement was announced, the price of a barrel of Brent crude rose by about 5 % to over 63 dollars. This week it slid back to a level of around 61 dollars.

The agreement of production cuts will stay in place for six months, and according to the agreement producer countries reduce their production by over 2 % from the October 2018 level. Russian energy minister Alexander Novak said that Russia plans to reduce its daily output gradually over the next few months for an overall reduction of 228,000 barrels a day. Novak further noted that production cuts in January 2019 would be at least 50,000−60,000 barrels a day. In addition to the production cut deal, Russia, OPEC and a few other oil-producing countries are now preparing a separate cooperation agreement to be signed in the first quarter of 2019.

In late 2016, OPEC and Russia announced they had voluntarily agreed to a cut of nearly 1.8 million barrels a day. Russia’s cut amounted to 300,000 barrels a day, a reduction it gradually implemented in the first half of 2017. The agreement on production cuts was extended twice in 2017. In June this year, OPEC and Russia announced that they were abandoning the production cuts. During last months, Russian oil output has been at an all-time high for the post-Soviet period. Russia’s energy ministry reports that output in September-November averaged 11.4 million barrels a day, i.e. over 400,000 barrels a day above the previously agreed production ceiling, and over 4 % higher than in the same period in 2017.