What's going on?
The price of a barrel of crude oil rose by 5% on Friday thanks to production cuts finally being agreed upon (tweet this).
What does this mean?
OPEC (a group of major oil-producing countries that control a large chunk of the world’s supply of oil – and therefore have a big influence on its price) met on Thursday. Most people expected an agreement to cut production in order to stop the oil price from falling too much further.
Those expectations were confounded when OPEC initially failed to reach a consensus. But on Friday – after Saudi Arabia feared a deal might not be forthcoming at all – OPEC members, along with Russia and friends, agreed to lower production by 1.2 million barrels a day.
Why should I care?
For markets: Lower supply was demanded.
Usually, oil’s price is an economic indicator of demand – it tends to rise if the global economy’s growing because more countries and companies need oil to make and transport products, and fall if things are the other way around. But with falling expectations for future growth, there might have been more oil being produced than needed. Lower production, therefore, should help supply and demand get more in sync – and the oil that is produced should be worth a little more, which perhaps explains Friday’s price bump.
The bigger picture: Oil up, shale down.
Previously high oil prices earlier this year encouraged American shale oil producers (who use “fracking” to extract oil from rock formations) to up production, reducing the country’s reliance on then-expensive imported oil. Last week, the US shipped out more than it brought in for the first time in 45 years. The last time US production shot up, oil’s price later shot down – and shares of some US shale oil producers fell by as much as 8% late last week.