Reduction of 1.2 million barrels a day is designed to reduce oversupply
Oil prices spiked sharply higher Friday as major oil producers, including the OPEC cartel, agreed to cut global oil production by 1.2 million barrels a day to reduce oversupply.
Following two days of meetings, the Organization of the Petroleum Exporting Countries that includes the likes of Saudi Arabia and Iraq said they would cut 800,000 barrels per day for six months from January, though some countries such as Iran, which is facing wide-ranging sanctions from the United States, have been given an exemption.
The balance will come from Russia and other non-OPEC countries. The United States, one of the world’s biggest producers, is not part of the deal.
“This is a major step forward,” said United Arab Emirates’ Energy Minister Suhail Mohamed al-Mazrouei, who chairs the regular meetings in Vienna in his capacity as President of the OPEC Conference.
Oil producers have been under pressure to reduce production following a sharp fall in oil prices over the past couple of months. The price of oil has fallen about 25 per cent recently because major producers — including the U.S. — are pumping oil at high rates.
The reduction certainly met with the response hoped for by ministers. Immediately after the announcement:
- Brent crude, the international standard, was up $3.11 US a barrel, or 5.2 per cent, at $63.17.
- Benchmark New York crude was $2.23, or 4.3 per cent, higher at $53.72 a barrel. And
- Western Canadian Select soared by 12 per cent, up $4.50 a barrel to $37.50.
- And West Texas Intermediate jumped by $2.25 to $53.75 a barrel.
- Ann-Louise Hittle, a vice-president at oil industry expert Wood Mackenzie, said the production cut “would tighten” the oil market by the third quarter next year and help lift Brent prices back above $70 per barrel.
‘Self-interest ultimately prevails’
“For most nations, self-interest ultimately prevails,” she said. “Saudi Arabia has a long-term goal of managing the oil market to avoid the sharp falls and spikes which hurt demand and the ability of the industry to develop supply. On top of this, Saudi Arabia also needs higher oil revenues to fund domestic Saudi spending.”
Russian Energy Minister Alexander Novak called the negotiations with the OPEC nations “fairly challenging” but said the decision “should help the market reach a balanced state.”
“I think this is a strong signal to anybody who has doubted it that our co-operation is continuing and we can react to any challenge the market throws at us,” he said in Russian through a translator.
OPEC’s reliance on non-members like Russia highlights the cartel’s waning influence in oil markets, which it had dominated for decades.
The OPEC-Russia alliance was made necessary in 2016 to compete with the United States’ vastly increased production of oil in recent years. By some estimates, the U.S. this year became the world’s top crude producer.
The cut is unlikely to be greeted warmly by U.S. President Donald Trump, who has been pressuring the cartel publicly to maintain production. On Wednesday, he tweeted: “Hopefully OPEC will be keeping oil flows as is, not restricted. The World does not want to see, or need, higher oil prices!”
Canadian reaction
The 12 per cent jump in the price of Western Canadian Select (WCS) on news of the deal is also attributable to an increased rail capacity and the Alberta government’s imposition of production cuts, said Sean Coakley, a market analyst with Cambridge Global Payments in Vancouver.
“Some of the capacity constraints on rail is actually being loosened so that the ability to get WCS to market is actually improving,” he said.
Coakley said he’ll also be watching over the next six to 12 months to see what effect a tightening credit market has on oil prices.
“A lot of this production is getting financed by high-yield debt in the United States. So, part of the concern that’s been emanated is that disruptions in the credit market might actually knock U.S. oil production. And that could actually lead to higher oil prices for Canada,” he said.
Martin Pelletier, a portfolio manager with TriVest Wealth Counsel in Calgary, called Alberta’s production cut “very well timed.”
“It was done prior to the OPEC meeting, which I thought was quite quite beneficial for Albertans and Canadians,” he said. “So now the differential is narrowed in half from where it used to be, so we’re participating, finally, in the recovery with oil prices.
“By taking those those barrels off the market, it makes a big difference. It creates a fully functioning market once again … It’s an extraordinary situation that demanded some attention and and the government acted.”
One stumbling block to an agreement had been Iran, Saudi Arabia’s regional rival and fellow OPEC member, which had been arguing for an exemption to any cuts because its crude exports are being pinched already by U.S. sanctions.
Al-Mazrouei said that in the end Iran had been given an exemption, as well as Venezuela and Libya.
That “means that the percentage we will contribute among us is going to be a bit higher,” he said.
“We within OPEC are committed to distribute the 800 (thousand bpd) among us and deliver on it.”
