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Oil price surges as Opec agrees first cut in output since 2008 www.theguardian.com
The price of oil has surged by 8% after the 14-nation cartel Opec agreed to its first cut in production in eight years.
Confounding critics who said the club of oil-producing nations was too riven with political infighting to agree a deal, Opec announced it was trimming output by 1.2m barrels per day (bpd) from 1 January.
The deal is contingent on securing the agreement of non-Opec producers to lower production by 600,000m barrels per day. But the Qatari oil minister, Mohammed bin Saleh al-Sada, said he was confident that the key non-Opec player – Russia – would sign up to a 300,000 bpd cut.
Russia’s oil minister, Alexander Novak, welcomed the Opec move but said his country would only be able to cut production gradually due to “technical issues”. A meeting with non-Opec countries in Moscow on 9 December has been pencilled in.
Al-Sada said the deal was a great success and a “major step forward”, but the news that Saudi Arabia had effectively admitted defeat in its long-running attempt to drive US shale producers out of business was enough to send the price of crude sharply higher on the world’s commodity markets.
Brent crude was trading at just over $50 a barrel following the completion of the Opec meeting in Vienna – an increase of almost $4 on the day.
Saudi Arabia will bear the brunt of Opec’s production curbs, having agreed to a reduction in output of just under 500,000 bpd.
Iraq has agree to a 210,000 bpd cut, followed by the United Arab Emirates (-139,000), Kuwait (-131,000) and Venezuela (-95,000). Smaller countries are also reducing output, but Iran – which has only recently returned to the global oil market after the lifting of international sanctions – has been allowed to continue raising output. Three OPEC countries - Kuwait, Venezuela and Algeria - will monitor compliance with the agreement in an attempt to prevent quota busting.
Indonesia has suspended its membership because, as a net importer of oil, it wanted the price of crude to stay as low as possible and declined to cut output.
The price of oil has fallen from $115 a barrel since the summer of 2014 as a result of weak demand and the decision by Riyadh to keep production levels high. Saudi Arabia gambled that it could drive higher-cost US shale producers out of business but found the financial cost of more than halving the oil price too much to bear. At one stage, oil prices fell below $30 a barrel.
Opec has been trying to piece together a production-cutting deal throughout 2016 but previous meetings have failed as a result of ill feeling between Saudi Arabia and Iran. The cartel, which exerted enormous power over the oil price in the 1970s, was under pressure going into this week’s meeting to prove that it still had relevance in a market where it is responsible for less than half global output.
Neil Wilson, a senior market analyst at ETX Capital, said Opec had “confounded the naysayers”. He added that it was a “triumph for the cartel, proving it is still relevant, but the devil is in the detail … There are a few doubts but, on the whole, Opec should be pleased with a job well done at long last. This is likely to keep crude closer to $50 than $40 for now”.
Other analysts warned that the deal was likely to fall apart. Mike Jakeman, the commodities editor at the Economist Intelligence Unit, said he thought it unlikely that the agreement would lead to a sustained increase in the oil price.
It is possible that some cheating will occur. Opec’s members do not have a good track record of sticking to production quotas. There has also been no firm commitment yet from Russia, the largest non-Opec producers. It is possible that Russian production could fill the gap left by Saudi Arabia. And even at 32.5m bpd, global oil production will still be at a historically high level. There is no threat of an oil shortage that could see the price zoom back up.
Jakeman said that even if there was a sustained rise in prices, the response would be higher production from the US shale sector, which would drive prices back down again. “We think the lack of a sustained rise in prices will see the deal fall apart within a year,” he said.
Published Date:2016-12-01
