Opec springs surprise, agrees to cut output

SINGAPORE: The Organisation of Petroleum Exporting Countries (Opec) shocked markets with a deal to cut oil output after kingpin Saudi Arabia allowed bitter rival Iran to be exempted, but analysts warned yesterday 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 6% on 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.

“Opec made an exceptional decision today ... after two and a half years, Opec reached consensus to manage the market,” said Iranian Oil Minister Bijan Zanganeh, who had repeatedly clashed with Saudi Arabia during past meetings.

“We have decided to decrease the production around 700,000 bpd,” he said.

The move would effectively reestablish Opec production ceilings abandoned a year ago.

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 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 the oil cartel 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% of the world’s crude – holds its next twice-yearly meeting in Vienna on Nov 30.

Analysts said the market is likely to be cautious until the details of the deal are worked out, while traders will also be watching whether non-Opec producers will also make cuts.

Oil prices rose nearly 2% yesterday, extending their rally on optimism over Opec’s output cut plan. Earlier in the day, prices were down, with crude futures retreating from their 6% surge on Wednesday, the biggest in a day since April. A steady dollar and weak US stock market also limited some of the upside in oil in early trading.

Brent crude was up 80 cents, or 1.6%, at US$49.49 by 1548 GMT. Brent hit a session peak at US$49.50, the highest since Sept 9, after falling to US$47.99 earlier.

US West Texas Intermediate crude rose 85 cents, or 1.8%, to US$47.90. The contract hit a one-month high of US$48.02, after a session low at US$46.60. – AFP, Reuters

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