October 27, 2016

Opec agrees on oil output cut at Algiers meeting


Some of the world’s biggest oil producers have agreed to cut production for the first time in eight years, sending crude prices higher by more than 6 per cent and sparking big gains for energy stocks.

After more than four hours of talks in Algeria on Wednesday Opec committed itself to reducing output to between 32.5m barrels a day and 33m b/d, according to ministers.

The agreement surprised oil traders who thought a consensus would be difficult to reach because of divisions between Saudi Arabia and Iran, two of Opec’s largest and most influential members. Brent crude jumped $2.84 a barrel to $48.85.

While Brent eased by 0.1 per cent to $48.65 on Thursday morning in Asia, WTI crude was up 0.2 per cent at $47.13 and oil’s overnight leap galvanised energy shares around the region.

Australia was the standout, with the S&P/ASX 200 energy index surging 5.7 per cent, on track for its biggest rise since mid-April. Origin Energy, Santos and Beach Energy were all up between 7 and 10 per cent.

The Opec push marks the first co-ordinated action to bolster crude prices that have battered the finances of producer economies since the oil collapse began two years ago. The last time the cartel cut production was during the financial crisis in 2008.

It is also a shift in the Saudi-led Opec strategy of pumping flat out to maintain market share and put pressure on high-cost producers such as US shale drillers.

But the lack of detail on how much each producer will limit output, if at all, will raise questions among oil analysts and other market observers on the execution and success of any deal in easing an oversupplied market.

The new production target is a decrease of between 240,000 b/d and 740,000 b/d from the 33.24m b/d the cartel pumped in August, according to analysts’ estimates compiled by Opec.

Emmanuel Ibe Kachikwu, Nigeria’s minister of state for petroleum resources, said Opec would set up a committee to work out how the reduction in production will be split among members. It will report back to the group in November, which is when Opec plans to hold its next formal ministerial meeting in Vienna.

The amount of oil taken off the market will determine how successful the deal is in alleviating a supply glut. Oil analysts and people familiar with Saudi oil policy believe between 700,000 and 1m b/d needed to be taken off the market to have a meaningful impact on global supplies and prices.

“For the [oil price] rally to be sustained, however, details must be given on how the cuts will be implemented. A collective cut will not carry much weight in the market,” said Amrita Sen at consultancy Energy Aspects.

Saudi Arabia, Iran and other ministers had said before the meeting any talks would be informal with the view to reaching a binding agreement over the next few months. But as the discussions on Wednesday continued they decided to make the gathering a formal meeting of Opec.

“We have a very good deal,” said Opec’s secretary-general, Mohammad Barkindo, with his thumbs up. The agreement was viewed positively by equity markets. The S&P 500 energy sector index leapt 4.5 per cent, with oil producers ConocoPhillips up 7 per cent, ExxonMobil up 4.4 per cent and Chevron 3.2 per cent higher.

Mohammed bin Saleh al-Sada, Qatar’s energy minister and president of Opec, said after the meeting co-ordinated action was needed as excess supplies were taking longer than expected to ease, keeping the oil market under pressure.

“The rebalancing was going to happen anyway but we needed to accelerate,” he said.

Saudi Arabia had previously made its involvement in any deal to freeze or cut output conditional on the participation of its fierce regional rival Iran. Tehran had argued it should be allowed to ramp up production to at least 4m b/d after years of restrictions under western sanctions. A previous attempt to limit production in April was scuttled by the division.

This week the kingdom showed a softer stance saying privately it would be willing to join a co-ordinated cut to production of up to 1m b/d should Iran freeze its production, said one person familiar with Saudi policymaking.

Khalid al-Falih, the kingdom’s energy minister, offered a more conciliatory tone, conceding that Iran, Nigeria and Libya — which have variously lost output because of violence in their countries or sanctions — would not be as tightly bound by any deal to cap output.

The kingdom, ahead of the meeting, had been assessing various scenarios that would see it bear the brunt of a co-ordinated cut to production should Iran freeze its production.

The main tensions had centred on the level at which Iran would curb its output. It is unclear if this has been fully resolved or if Wednesday’s discussions had laid the groundwork for a more solid agreement at the group’s next official meeting.

“Opec is moving in the right direction, but this is not over,” said Jamie Webster, a Fellow at the Center on Global Energy Policy. “Finding numbers for each producers’ production and following through with cuts means there is still a way to go.”

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