OPEC reaches deal to cut oil production

Oil prices spiked more than 9pc as the cartel reached an agreement to cut oil production by 1.2 million barrels a day.

Iran's Minister of Petroleum Bijan Namdar Zangeneh arrives at the OPEC meeting. Picture: AP Photo/Ronald Zak.

Oil prices spiked as OPEC representatives reached a landmark deal Wednesday to reduce crude oil output, after months of wrangling between OPEC members and market uncertainty about the ability of the once-mighty cartel to agree.

Almost exactly two years after the Organization of the Petroleum Exporting Countries group made a historic decision to avoid cutting output and allow prices to fall, the group said Wednesday that it agreed to cut production by 1.2 million barrels a day from the current 33.6 million barrels. It also said it expects producers from outside the cartel to join with additional cuts totaling 600,000 barrels a day.

The OPEC cut alone represents about 1 per cent of global production, which will help to reduce a glut of supply that has depressed prices for more than two years. The promised cuts include significant reductions by heavyweight exporters including Saudi Arabia, the group’s most powerful member and de facto leader.

While questions remain about the long-term impact of the deal and the ability of the group to enforce the quotas, the agreement was hailed by investors. US oil prices surged 9.3 per cent to $US49.44, hitting a one-month high.

“OPEC is back in business,” said Daniel Yergin, vice chairman of IHS Markit and a longtime oil-market watcher. “This will rank as one of their historic decisions. If they hadn’t done it, they would have been looking at the abyss -- and the abyss is very deep. Interest won over politics today.”

OPEC members have said they are targeting prices as high as $US55 to $US60 a barrel, a level that would boost petroleum-dependent economies badly damaged by two years of prices that were often below $US50 a barrel. Such a level is widely viewed as a sweet spot for oil prices, since it is high enough for more oil producers to profit, and economists say it is still low enough to support economic growth.

Though oil-industry analysts say the crude oil market was already working off the supply glut and headed toward balance sometime next year, Wednesday’s deal is expected to speed that process. As less oil is produced, that will help to draw down the record amounts of oil stored in tanks around the world that are weighing on prices.

But risks remain. OPEC said the agreement would be re-evaluated at its next regular meeting in six months. And the deal sets up a new showdown between OPEC and its rival producers in the US, where an oil boom spurred by hydraulic fracturing helped to feed the glut that depressed prices.

Low prices pushed US output down. OPEC’s deal and higher prices are a boon for surviving US shale producers, who now have an incentive to ramp up their own production again, eventually bringing a halt to the oil market rally.

“US shale is a huge complicating factor in OPEC’s ability to manage the market,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University. “At $US50, US shale can start growing again.” What remains to be seen, he said, is how quickly the US industry will grow.

The benefit to US producers of a higher price is part of what OPEC sought to avoid by eschewing cuts during the last two years. Even earlier this year, Saudi Arabia held fast to its opposition to production cuts and said it could live with low prices, while higher-cost producers like the US would be forced out.

But while US production did decline, oil prices also fell to levels lower than many thought -- less than $US28 a barrel in January -- and stayed there for longer than expected.

Saudi Arabia pushed hard this time for a broad agreement that would include OPEC and non-OPEC members, and agreed to take on the highest burden of cuts -- a 486,000 barrel a day. OPEC said Russia is on board for a cut of 300,000 barrels a day.

“It’s a good day for the oil market, it’s a good day for the oil industry,” Saudi Arabian energy minister Khalid al-Falih said following the agreement, adding that the “deal is not only what we wanted, but what the market wanted.”

Wednesday’s deal strikes a fresh path for the 56-year-old oil cartel, whose members have struggled to find common ground.

Saudi Arabia and Iran, in particular, have clashed over regional politics in the Middle East, supporting differing sides in violent conflicts in Syria and Yemen.

Iraq and Iran had been reluctant to put limits on their increasing output. It took months of negotiations to secure their agreement, and Wednesday’s meeting still resulted in one member, Indonesia, leaving the group.

The group has a checkered history of complying with its own agreements, with countries often producing more than their agreed upon share. Analysts said oil traders would watch the agreement warily in the coming weeks.

The pact throws a potential lifeline to the economies of OPEC members like Angola, Venezuela and Nigeria, where prices below $US50 a barrel have reduced government revenues and threatened a petroleum-dependent social fabric.

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