Oil producers surge as OPEC cuts output

OPEC’s first production cut in almost a decade has served up a $9bn oil-­fuelled rally for Australian-listed producers.

OPEC says it will reduce output by about 1.2 million barrels a day by next month.

OPEC’s first production cut in almost a decade and the prospect that non-OPEC producer Russia will join in with cuts of its own have served up a $9 billion oil-­fuelled rally for Australia’s listed producers.

Share prices in the leading oil players had their strongest day in eight years as world oil prices jumped as much as 10 per cent to more than $US50 a barrel on news from OPEC’s Vienna meeting that the battered cartel’s two-year attempt to kill off the US shale oil industry by flooding markets was over.

Sector leader Woodside rose $1.92, or 6.4 per cent, to $31.54, a market value increase of $1.62bn, while PNG producer Oil Search jumped 59c (9.1 per cent) to $7.04.

The benefit of the rise in oil prices for the debt-heavy Santos and Origin was particularly welcome news, with Santos climbing 46c, or 11.7 per cent, to $4.39 and Origin rising 52c (8.7 per cent) to $6.46.

This outpaced a 1.1 per cent jump in the S&P/ASX 200 index.

The $9bn uplift for the listed sector (it includes a weighted proportion of BHP Billiton’s 5 per cent gain to $25.61 for its petroleum division) underplays the broader impact of the stronger oil price.

Most of Australia’s oil and gas production is in the hands of the big multinational oil giants such as ExxonMobil, Shell, Conoco­Phillips and BP, all of which enjoyed strong share price gains in their home markets.

Australia is a small oil producer, with annual production falling from 160 million barrels five years ago to 115 million barrels because of natural field depletion and a lack of new developments and discoveries.

But a $200bn investment blitz on export LNG will soon establish Australia as the world’s biggest producer of seaborne gas. And as it is priced with reference to oil prices (gas has one-sixth the ­energy content of oil), stronger prices could deliver relief for LNG prices.

LNG prices have more than halved to $US7 a gigajoule in sympathy with oil’s retreat from $US100 a barrel two years ago. The new wave of LNG projects were predicated on $US15 gas and can struggle to break even at oil prices below $US40 a barrel.

Australia’s declining oil self-sufficiency requires increasing imports of finished petroleum products, with higher (or lower) prices capable of having a telling impact on balance-of-payments figures. But as a net exporter of ­energy in its many forms — oil, gas, coal and uranium — higher oil prices are usually a net win for the nation.

OPEC, on the other hand, has been doing it tough in the lower oil price environment. The US Energy Information Administration estimates member nations’ annual oil receipts have collapsed from $US750bn in 2014 when oil was fetching $US100 a barrel to a likely $US340bn ($460bn) this year.

The decision in 2014 by OPEC leader Saudi Arabia not to cut production in the face of the hand-over-fist growth in US production from shale oil sent prices to as low as $US26 a barrel in February this year. With the bounce in the West Texas Intermediate oil price early yesterday from $US45.23 a barrel to $US49.67 a barrel at the close of US markets, the oil price is 91 per cent higher than its February low — a level that sent shockwaves through the global industry, forcing it to slash exploration and capital expenditures by more than $US500bn.

OPEC said it would reduce output by about 1.2 million barrels a day by next month, reducing its daily output to 32.5 million barrels or about one-third of world supply — a far cry from the 60 per cent-plus control it wielded in the 1970s.

RBC Capital’s commodities desk said the OPEC cut was “one of the most headline-constructive OPEC announcements in recent memory”. It said the agreement “reflects the tough economic circumstances faced by OPEC’s sovereign producers”.

“As long as Saudi Arabia remains firmly committed to the deal, we believe that the arrangement will hold,’’ RBC said.

“The move likely kicks off the second part of the rebalancing act, helping to draw down the global inventory glut. We maintain our view that (WTI) will average $US56.40 a barrel in 2017, reaching the low range by late 2017.”

The surprise factor from Vienna was Russia saying it would rally to OPEC’s call for non-OPEC producers to cut production by 600,000 barrels a day. Russian Energy Minister Alexander Novak is due in Vienna next week when he is expected to confirm that Russia is good for half of the non-OPEC cut, but on the proviso OPEC actually achieves the planned cut in its own production to the 32.5 million barrels-a-day target.

ANZ’s commodities desk said the ability to get non-OPEC involvement had helped “soothe concerns in the market that other producers would just fill the void left by OPEC”.

It said issues also remain around adherence to the agreement, and what the reaction from the rest of the industry is — namely the US shale oil industry.

“With data showing US production increased by 9000 barrels a day to 8.7 million barrels a day last week, there is a real risk that higher prices could reactivate more dormant shale oil,” ANZ said. “This is the main reason why we don’t expect to see prices surge much higher than $US60 a barrel in 2017.”