• OPEC headquarters in Vienna, Austria.

OPEC headquarters in Vienna, Austria. (Photo : OPEC)

The fractious member states of OPEC (the Organization of Petroleum Exporting Countries) meeting in Vienna, Austria agreed to slash crude oil production by a larger than expected 1.2 billion barrels per day to drive up sagging oil prices.

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The production cuts agreed to on Nov. 30 will start on January 1, 2017 and will last for only six months. It will involve all 13 OPEC member states.

The unexpectedly huge output cut immediately saw a large spike in crude prices. The price of Brent crude jumped 10% to $51.94 a barrel, while US crude rose 9% to $49.53 a few hours after the agreement was announced.

These prices are expected to rise in the short-term (perhaps hitting $60 to the barrel) if OPEC members can retain the discipline that led to the production cut and if non-OPEC oil producing countries support OPEC.

OPEC's price slash is its first in eight years and was taken amid a backdrop of massive crude oil inventories and fierce competition from shale oil drillers in the United States, whose aggressive exploration and production have driven down oil prices over the past few years.

Non-OPEC countries will be expected to cut production by 600,000 barrels a day, said OPEC. Cash-strapped Russia, however, remains a wild card despite reportedly agreeing to reduce production by 300,000 barrels daily from its output of more than 10 million barrels a day.

"This agreement comes from a sense of responsibility from OPEC member countries and non-Opec member countries for the general well-being and health of the world economy," said OPEC president Mohammed Bin Saleh Al-Sada.

OPEC includes Algeria, Angola, Ecuador, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE and Venezuela. Indonesia agreed to suspend its OPEC membership since it is now a net oil importer.

Saudi Arabia agreed to cut production by 500,000 barrels per day or by 4.5 percent, which will reduce its output to some10.06 million barrels per day.

While the production cut will keep boosting prices, this short-term solution will force U.S. shale oil producers to ramp-up production to take advantage of the increased incomes. More shale oil, however, will inevitably cause oil prices to fall.

Analysts agree the deal will need the full support of non-OPEC oil producing countries for it to succeed in driving-up oil prices in the long-term. That agreement is uncertain because of Russia's precarious economic situation.

OPEC will hold talks with non-OPEC producers on Dec. 9.