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Business

September 30, 2016

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OPEC shocks market with deal to cut oil output

OPEC shocks market with deal to cut oil output

SINGAPORE: OPEC shocked markets with a deal to cut oil output after kingpin Saudi Arabia allowed bitter rival Iran to be exempted, but analysts warned Thursday the move would not likely have a lasting impact.

The cartel´s announcement of the first reduction in eight years sent crude prices surging up to six percent Wednesday, while energy firms in the US and Asia followed suit with huge gains. At the end of six hours of negotiations and weeks of horse trading, OPEC announced the plan to cut production to 32.5-33 million barrels per day from the 33.47 million in August, the International Energy Agency said.

The deal, in Algiers during an informal meeting with Russia, was hammered out after the group´s biggest producer Saudi Arabia agreed Iran, which is ramping up output after years of Western economic sanctions, would be exempted from the cut.

A Saudi-led effort to freeze output collapsed in April after Iran refused to participate in a reduction. "It is Saudi Arabia who has clearly blinked first, allowing Iran, its main rival, to ramp up production," said Jeffrey Halley, senior market analyst at OANDA.

"We shouldn´t underestimate the major shift by Saudi Arabia," he told AFP. "These two don´t see eye to eye on anything so this is a huge concession by Saudi Arabia to ´lubricate´ the process."

Saudi Arabia and Iran, the Middle East´s foremost Shiite and Sunni Muslim powers, are at odds over an array of issues including the wars in Syria and Yemen. But analysts said economic pressure from falling oil revenues pushed OPEC members to reach a deal, while others warned OPEC has a poor track record of fulfilling such commitments, and traders are not sure if Saudi-Iran cooperation would hold.

Details, including which countries make which cuts, will be worked out when 14-member OPEC -- which produces about 40 percent of the world´s crude -- holds its next twice-yearly meeting in Vienna on November 30.

The cartel´s richer members, particularly the Gulf states, had preferred to battle it out with non-OPEC producers such as the United States for global market share by keeping production high.

Its refusal to make cuts in the past -- despite a painful supply glut and weak demand -- had contributed to a slump in prices from more than $100 a barrel in June 2014 to near 13-year lows of below $30 in early 2016.

But Halley said: "Saudi Arabia have perhaps reassessed their dumping oil strategy to put US shale out of business as the pressure on their budgets has clearly reached a tipping point as well."

The plunge in oil revenues has left Saudi Arabia with a record deficit last year, prompting the country to cut the salaries of cabinet ministers and freeze the wages of lower-ranking civil servants.

"Many OPEC members are suffering economically from low prices. Their economies are stagnating or going backwards and they face budgetary issues," said Greg McKenna, chief market strategist at forex broker AxiTrader.

"So it appears the fiscal imperative seems to have trumped OPEC´s internal politics. That means I do think this move in prices and the promised reduction will be sustained," he told

 

 

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