Why OPEC’s production cut might not have the desired effect

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After months of speculation by oil market watchers, the Organization of the Petroleum Exporting Countries (OPEC) recently announced a six-month production cut of 1.2 million barrels per day (b/d) with the aim of driving up the price. It’s set to take effect on Jan. 1.

Saudi Arabia will be responsible for a little less than half of the total, or just under 500,000 b/d, followed by 210,000 for Iraq and about 135,000 for Kuwait and the United Arab Emirates each. A nonmember, Russia, pledged to cut about 300,000 b/d as part of the deal.

The move, which could be extended for another six months, was in response to the expected continuation of weak oil market conditions: too much supply and too little demand. The result was that for the first time since 1998, OPEC reported a collective current account deficit of almost US$100 billion in 2015, compared with a surplus of $238 billion in 2014.

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