OPEC's decision to make a U-turn and agree to cut oil production is a response to budget issues, particularly in Saudi Arabia, Marc Ostwald, Global Strategist at ADM Investor Services, told Radio Sputnik.

The 14 members of�OPEC held a meeting in�Algiers on�Wednesday, where some of�the world's largest oil producers unexpectedly agreed to�cut production for�the first time in�eight years.

The move represents a U-turn since�November 2014, when the cartel decided not to�impose a cut in�oil output despite�plummeting oil prices amid�a glut of�shale oil.

Marc Ostwald, Global Strategist at�ADM Investor Services, told Radio Sputnik that the agreement is an effort by�oil producers to�put in�place a "floor" to�support the oil price, particularly given the tendency for�prices to�fall in�autumn. "It's about�budgets, particularly the Saudi Arabian budget.

They've already burnt through�about $150 billion of�foreign exchange reserves to�subsidize their budget, and things are only getting worse," Ostwald explained. "What they're really trying to�do is put a floor under�oil prices. What they don't want is the typical seasonal fall that we get at�this time of�the year in�oil prices. You get a bit of�an overhang once the driving season and the summer demand starts dropping off, ahead of�the winter demand."

"They need to�avoid that, above�all in�countries like�Saudi Arabia, because above�all they're running a budget deficit of�about 15 percent of�GDP, which is absolutely enormous. There's a point at�which they can't erode their reserves more quickly than�they already are."

The agreement is a vague one, which promises to�impose an output ceiling of�between 32.5 million and 33 million barrels per day. OPEC produced 33.327 million barrels of�oil per day in�August, so the announced cut in�output is relatively small. It might not even be achieved, given that some OPEC members have received concessions and could increase their production.

"This is a form of�progress in�communication terms, but�what it actually does in�production terms is a completely different ball game," Ostwald said. Saudi Arabia, the cartel's biggest producer, has offered concessions to�three other members, Iran, Libya and Nigeria, which could be allowed to�produce oil "at maximum levels that make sense," Saudi Energy Minister Khalid al-Falih said.

"There are going to�have to�be concessions made for�the countries where output, particularly in�the last year or year and a half, has been impacted by�either technical outages or conflict outages, that specifically applied to�Libya most but�also Nigeria," Ostwald said.

Tehran had demanded that it be allowed to�increase oil production to�its pre-sanctions levels following�the lifting of�economic and financial sanctions associated with�its nuclear program in�January. The effect of�sanctions also means that Tehran is in�a stronger position than�Saudi Arabia to�weather low oil prices.

"Only one-third of�Iran's budget revenues actually come from�oil. They also get a substantial amount from�natural gas, but�they've got a much more diversified economy so they're in�a much better position to�play hardball. That realization, with�a little bit of�help from�other nations doing mediation, was what clinched this vague deal."

By Sputnik