Photographer: Andrey Rudakov/Bloomberg

OPEC’s Oil Cuts Deal Shifts Focus to Compliance: QuickTake Q&A

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For the first time in 15 years, the Organization of Petroleum Exporting Countries has sealed a global petroleum-cuts deal that includes non-members such as Russia. Can the parties to the deal stick to their pledge? Members have broken quota agreements before, while previous deals with Russia have mostly come to nothing. The fruits of this cut -- the immediate rally in oil prices -- might last only a few months. It’s still far from clear how long the cooperative spirit will last.

1. Why cut production?

To drain record global oil inventories caused, in part, by OPEC’s policy of unfettered production. Saudi Arabia, the group’s de facto leader, opened the floodgates in 2014 when it decided that protecting its market share was more important than price stability. This time around, to prove to Russia and other non-OPEC countries it meant business, Saudi Arabia signaled deeper cuts were possible if all producers joined the effort.

2. Have similar cuts worked before?

The largest cut ever by OPEC members, 2.2 million barrels a day in December 2008, was prompted by price per barrel dropping to near $30. Within a year, crude had recovered to around $75.

3. How’s this one working?

The price of brent crude rose about 20 percent in the two weeks after the deal, to about $56 a barrel.

3. Who will cut, and by how much?

Ten of OPEC’s 13 members will reduce their output by a combined 1.2 million barrels per day starting Jan. 1. The biggest reductions on a gross basis are by Saudi Arabia (486,000 barrels a day) and Iraq (210,000 barrels a day). Nigeria and Libya were exempted from the reductions. On the non-OPEC side: Russia pledged to cut by 300,000 barrels a day with the rest of the 258,000 barrels a day of cuts coming from 10 countries. Except for Russia, Oman and Kazakhstan, the rest of the non-OPEC nations will see their output decline naturally rather than implement voluntary cuts, raising skepticism among analysts about the real impact on supply next year.

4. How will compliance be monitored?

Algeria, Kuwait, Venezuela and two participating non-OPEC countries -- Russia and Oman -- will serve on a committee "to closely monitor the implementation of and compliance with" the agreement. For the most part, though, the deal relies on self-discipline among members.

5. Who might not comply?

Nobody’s been immune to a bit of quota busting, but Saudi Arabia, the United Arab Emirates and Kuwait have traditionally stuck to their promises. Elsewhere, compliance has tended to be patchier. Russia didn’t respect its side of agreements with OPEC in 2001 and 2008.

6. What’s the goal?

OPEC officials have expressed the hope that by midnight on the last day of 2016, oil will be approaching $60 a barrel, or double what it was in January. Analysts say $60 is possible, but so is that prices fall back to $55 a barrel once U.S. shale oil companies rev up their production.

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