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Cut in oil production stokes higher fuel price fears

Date: 01 December 2016   |   Author: Daniel Puddicombe

Low fuel prices in the UK could be coming to an end in 2017 following a decision by the Organisation of the Petroleum Exporting Countries (OPEC) to reduce the number of barrels of oil its members produce each day, the RAC has warned.

The cut in supply is OPEC's first reduction in eight years, with the oil organisation saying it will produce 35.2 million barrels a day, 1.2 million less than at present, from 1 January 2017.

In the past, OPEC - a consortium of 13 oil-producing developing countries - has oversupplied oil in order to maintain its market share.

According to OPEC, the production cut will enable its members to reduce their stock overhangs.

The cut comes after more than two years of low oil prices, which have more than halved, thanks to an oversupply of oil in the market.

OPEC said it is making the cut "in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry".

"The oil price will react in the coming days and weeks, likely pushing pump prices up in the short term, but it is what happens into 2017 that will be most important in determining if the days of relatively low priced fuel that drivers have benefited from this year are coming to an end," said RAC fuel spokesman Simon Williams.

Williams stressed future pump prices also depend on whether the US - which is not part of OPEC - will increase the amount of oil it produces. "It remains to be seen if the United States will respond by increasing yet more oil from fracking, which was not profitable when the oil price was lower."

"The sterling/dollar exchange rate is also crucial - as oil is traded in dollars a weaker pound, like we've seen since the EU vote, can have the effect of pushing prices in the UK up. A stronger pound can have the reverse effect," he added.