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Oil back on front pages: 7 days of Economics

  • Alexandra Estiot Economist
  • Paris
  • 02.12.2016
  1. OPEC countries cut production
  2. Oil prices rebound markedly
  3. Bad newsfor consumer spending
  4. US production should limit the brake

At the end of September, OPEC had announced a deal was in the making. This week, it was officially announced. Production will be limited to 32.5 million barrels per day, a 1.2 million cut, between January 1st and June 30th, 2017, a deal that could be extended for an additional 6-month. The agreement was made possible thanks to some non-OPEC countries claiming a production cut of 600k barrels per day. Here, Russia was specifically mentioned. Oil prices rebounded accordingly. Starting the week at USD 48 per barrel, the Brent crude oil price gained 12.5% to USD 53 on Thursday closing. 

Still, one of the largest producers is conspicuously absent of the deal: the US. There, oil extraction is particularly flexible and responds quickly to price fluctuations, while the break even cost has been driven markedly down over the last few years. This means that oil prices have a de facto ceiling, most likely around USD 60 per barrel. 

That is good news. Indeed, the inelasticity of energy demand to prices, especially in winter time, will result in alower purchasing power for households. In a context of depressed demand, this will come on top of rising interest rates, with a potential strong break on consumer spending.

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