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Category: Business, Economics and Finance / Industry / Oil and Gas

Oil surges 10pc as OPEC agrees to cut production

Thursday, 1 Dec 2016 05:16:07 | Stephen Letts

News of the deal drove the benchmark Brent crude price up by 9 per cent to $US50.41 a barrel. (Reuters)

Global oil prices have jumped by almost 10 per cent as the big producing cartel, OPEC, reached an agreement with its members and Russia to cut supply in a bid to clear a massive glut that has built up over the past two years.

Key points:

  • Major oil producers agree to cut global production by 2pc or 1.2 million barrels a day for six months
  • Oil price surges 9pc above $US50/barrel
  • Saudi Arabia and Russia agree to bigger cuts, Iran allowed to increase production

The deal brokered at talks in Vienna was achieved after OPEC's largest producer Saudi Arabia gave ground and agreed that Iran — still recovering from trade sanctions — was a special case and would be exempted from the cuts.

Iran was the major winner out of the deal being allowed to increase its production to 3.8 million barrels a day (MMbd).

The deal will reduce output by 1.8MMbd from January 2017 and runs for 6 months, with OPEC members contributing two-thirds of the cut.

It is the first time in 15 years major oil producers have banded together to turn down their taps and support flagging prices.

News of the deal drove the key global benchmark Brent crude up by 9 per cent to $US50.41 a barrel with US prices rising a similar amount.

The Saudis, like most oil producing nations, have been under severe financial stress as the price of oil has more than halved since 2014.

The country — which bore the brunt of the cuts to get the deal done — will cut production by almost 0.5MMbd with the other OPEC nations chipping in 0.7MMbd.

After the meeting, Saudi Arabia's Energy Minister, Khalid al-Falih said the deal was a welcome outcome.

"I think it is a good day for the oil markets, it is a good day for the industry and it should be a good day for the global economy - I think it will be a boost to global economic growth," he told reporters.

Russia, which has been pumping oil at record levels in recent months, said it will contribute up to 0.3MMbd.

Issue of compliance remains an issue for industry watchers

The cut, if adhered to, chops OPEC production by about 2 per cent to 32.5MMbd, which was the bare minimum required to bring supply and demand back into balance.

Analysis: Oil creating unlikely allies


That the Saudis and Russians are exploring ways to stabilise the oil market gives some idea about the carnage being wrought on big producers by the collapse in prices.

The global overhang of oil in storage will now need to be eroded through 2017.

However, the question of compliance remains an issue for industry watchers.

BNP Paribas commodities strategist Gareth Lewis-Davies said, while the deal has political credibility and a number, there are still many unresolved issues.

"The question that was avoided was to what extent is OPEC's commitment to cut dependent on the 600,000 bpd (of cuts) from non-OPEC," he told Reuters.

"We remain rather cautious over whether this is a cut from current levels or a cut from proposed levels for 2017 and, as a consequence, would not be real cuts."

Standard Chartered's head of commodities research Paul Horsnell described the talks as one of OPEC's "better days".

"If you compare it with the case of if there hadn't been an agreement, quite clearly, it's probably at the upper end of the expectations of what was going to be possible at this particular meeting," Mr Horsnell told Reuters.

"It's in nobody's interest here to be seen as collapsing this … for what it is at the moment, it looks pretty credible."

ABC/Reuters

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