OPEC Just Cut Production for the First Time in 8 Years: What You Need to Know

By Markets Fool.com

Last week, OPEC held a regularly scheduled meeting, and for the first time in a while, its members walked away with an agreement to cut production.

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In this segment from Industry Focus: Energy, Sean O'Reilly and Taylor Muckerman explain how much the cut, if it goes through, would mean compared to the daily global production of oil today. Also, the hosts talk about why the agreement has meaning beyond the possible reduction in crude pumped by cartel members, and how this agreement compares to OPEC members' decision to produce at will in November 2014.

A full transcript follows the video.

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This podcast was recorded on Sept. 29, 2016.

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Sean O'Reilly: Stop the presses: OPEC agreed to, on apreliminary basis, cut production. What?!

Taylor Muckerman:Yeah,that's what they said. There's no details.

O'Reilly:There were a few, to be fair.

Muckerman:Well, there are some estimates.

O'Reilly:Let's take a step back. OPECsurprised everybody yesterday, sent oil up 5% to 6%. They had beentalking downthese discussions in Algiers for one or two weeks -- "We want to cut,but this is just preliminary, we don't expect to decide anything." Russia and Iran talked it down, Saudi talked it up. It's a little verbal chess game. Then,yesterday [it] hits the wiresthat they agreed to a preliminary cut. Details are going to be announced in a month.

Muckerman:Nov. 30.

O'Reilly:Thesymmetry there is pretty funny. That date, two years ago ...

Muckerman:That's their bi-annual meeting, ithappens in November. That year, it was Nov. 24.

O'Reilly:So,right before Thanksgiving, they were like, "Yeah, we're not going to do anything," and oil plummets. And here we sit, two years later.

Muckerman:People werecooking their turkeys by the oil drum fires in 2014.

O'Reilly:Because it was so cheap.(laughs) But,correct me if I'm wrong,they're talking about, in a month, agreeing toactually setting firmly about a 750,000-per-day barrel decrease in supply.

Muckerman:That's what anIranian representative suggested. But if you look across the board,there's a lot of people that aren't quite sure it'll even reach 500,000 barrels per day. But even if it was 700,000 barrels a day --

O'Reilly:Or 500,000.

Muckerman:Either way, that's only 0.7% ofglobal oil production. It's not a huge, earth-shattering thing. What is the big deal is that OPEC countries havereturned to the table andreached a conclusion, rather than just walking away with their hands up in the air.

O'Reilly:Right,Saudi Arabia and Iran are actually talking. One of them closed the other's embassy in their country a year ago. They were mean for a while.

Muckerman:These countries traditionally don't get along. This isn't totally resigned to just oil markets, when youlook at how these countries are playing chess against each other.

O'Reilly:ThePersian Empire invented chess.

Muckerman:Yeah. There's a little bit ofhistorical nature to that suggestion, as well. When you look at what they've been doing,Saudi Arabia is much more reliant, for budgetary reasons, on high oil prices, high oil revenues. Iran isjust having a field day because they hadall these sanctions against them and now they've been lifted.

O'Reilly:This is all free money.

Muckerman:Essentially. It's money they didn't have. So,they became less reliant on oil revenuesover that time period,and now they can sit on lower prices, higher production, for a little bit longer thanSaudi Arabia can. You look at Saudi Arabia cuttingministers' salaries by up to 20%, cuttingsubsidies across the boardto their civilians.

O'Reilly:They canno longer buy their solid gold Lamborghinis. I feel terrible for them.

Muckerman:I mean, you kind of have to at some point,because oil does represent a significant partof their overall budget.

O'Reilly:Their social programs,if you look at the oil ministers, it's everybody.

Muckerman:Yeah,everybody benefits when they sell oil at high prices. If you look at 0.7% of oil cutbacks, not a huge deal, especially when you look at the landscape in the United States with so many wells that have been drilled but not completed. Youlook at a research company likeRystad Energy, [which] suggests that 90% of wells that are drilled but not completed can beeconomically completed at $50 a barrel, which we're almost at. So, I think supply is going to be able to make up for lost ground,in terms of what OPEC issupposedly going to pull back on.

O'Reilly:On the other hand, it'sminuscule compared to global daily production size.

Muckerman:Yeah.I think it's just the significance of them actually coming to an accord,rather than walking away from the table.

O'Reilly:Inaddition to that, just to play devil's advocate a little bit: When the fateful day occurred two years ago,OPEC said they weren't doing anythingand they were going to go for market share, we not going to cut and just toguarantee a price, what was the globaloversupply numberper day?

Muckerman:More than it is today.

O'Reilly:That's my point. It was 1.5 million barrels a day oversupply? So, the 500,000 or 750,000 barrels per day that OPEC is talking about cutting -- granted, at this point --in addition to the gargantuan capital budget cuts that haveoccurred in the industry, I'm like: is the oversupply done?

Muckerman:Long term,you could start to worry about that. But in the near term,like I said, you have almost 4,000, maybe over 4,000 wells in the United States that can be fracked at $50 a barrel. That could drive up U.S. production, which has been pulling backsince November 2014, from record highs. So,you're seeing the ability of companies likeEOGandContinental Resources, who have already startedto complete some of these wells in the $40 range,and then a company likeWhiting Petroleumthat was shopping itself forwhat looked to be pretty cheap just several months ago.

O'Reilly:But there were no takers.

Muckerman:There were no takers. And here they are saying, "Once $50 a barrel comes around,we're going to start completing some these wells." By that,I mean that the wells have been drilled,but they haven't been cemented,encased, they haven't been fracked. So they're not producing. But that's traditionally the moreexpensive part of the whole process. So companies have been drilling these sites and letting them idle until they reach a certain dollarvalue per barrel. It seems to be $50 per barrel is that magic numberfor the broad majority of these wells. It's gotten to besuch a big deal that the EIA has actually started to come out with a monthly report ofhow many wells are drilled but uncompleted. You have seen it come downa little bit since Januarybecause the price of oil has risen since January. If you look at January 2014, there were around 2,500 wells that weredrilled but not completed. You'relooking at a little over 4,000 right now.

Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.