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The Oil Play of the Year (and Into the Next)

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Last week’s monumental OPEC meeting in Vienna was noteworthy for a number of reasons: it was the organization’s first cut in production in eight years, it will require non-cartel members participation and a verification process to ensure member’s comply with quotas, and it saw the coordination of the big three–Saudi Arabia, Russia and Iran–to help secure the deal to cutback nearly 2 million barrels of production daily.

But it nearly didn’t happen.

That’s because Saudi Arabia balked at the last minute, causing Russia’s Vladimir Putin himself to intervene. Not only did he mange to get Saudi Arabia to shoulder the lion’s share of the production cut, but he also managed to guarantee that Iran–Saudi Arabia’s arch rival–would not interpret this as a form of victory. To clench this concession and seal the deal, Putin himself volunteered a daily production cut of some 300,000 barrels a day.

The plan, which saw last-minute wrangling, also saw unusual consultations with traders. According to the Financial Times, the Saudi delegation met with several oil trading firms such as Vitol, Lukoil and Andurand Capital. While the reasons for the discussion prior to the deal were unclear, it was felt that Saudi Arabia wanted to assure itself that oil prices would indeed rise for its sacrifice.

But beyond the unseemly gathering of politicians, traders and oil producers, the assumption at the root of the oil production quota is that the drying up excess crude over production will inevitably lead to more envious values for oil.

On this point, the case is not clear. While OPEC and Russia have agreed to cutbacks starting in January and lasting only six months, many like the International Energy Agency’s (IEA) director, Fatih Birol, aren’t as convinced.

Following last week’s agreement, he noted that should oil reach $60 per barrel, U.S shale producers will almost certainly “re-awaken,” forcing prices back down and preserving “oil price volatility” for the forseeable future.

For analysts, traders and motorists, January is shaping up to be a month to watch , both on the markets and at the pumps.

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