Heavy oil benchmark swings dra­mat­i­cally higher just weeks af­ter hit­ting an all-time low, bring­ing price dis­count closer to his­toric norms

Saudi Ara­bia-led group and Rus­sia say they will cut pro­duc­tion by 1.2 mil­lion bar­rels a day start­ing in Jan­uary

OPEC and its Rus­sia-led al­lies agreed on Fri­day to slash oil pro­duc­tion by more than the mar­ket had ex­pected de­spite pres­sure from U.S. Pres­i­dent Don­ald Trump to re­duce the price of crude.

The oil-pro­ducer club will curb out­put from Jan­uary by 800,000 bar­rels a day (b/d) ver­sus Oc­to­ber lev­els, while non-OPEC al­lies will con­trib­ute an ad­di­tional 400,000 b/d of cuts, in a move to be re­viewed at a meet­ing in April.

Oil prices jumped about 5 per cent to more than US$63 a bar­rel as the com­bined cut of 1.2 mil­lion b/d was larger than the min­i­mum one mil­lion b/d that the mar­ket had ex­pected.

Saudi Ara­bia, de facto leader of the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries, has faced de­mands from Mr. Trump to help the global econ­omy by re­frain­ing from par­ing sup­plies.

An out­put cur­tail­ment also would pro­vide sup­port to Iran by in­creas­ing the price of oil amid at­tempts by Wash­ing­ton to squeeze the econ­omy of OPEC’s third-largest pro­ducer.

Asked whether the de­ci­sion to cut could sour Riyadh’s re­la­tions with Wash­ing­ton, Saudi En­ergy Minister Khalid al-Falih told re­porters the king­dom was ready to pump more should a ma­jor sup­ply out­age oc­cur.

“We will not squeeze con­sumers be­yond what they can af­ford,” he said, adding that given the United States had re­cently be­come the big­gest oil-pro­duc­ing coun­try, its en­ergy com­pa­nies were “breath­ing a sigh of re­lief.”

Fur­ther com­pli­cat­ing Riyadh’s de­ci­sions this week was the cri­sis around the killing of jour­nal­ist Ja­mal Khashoggi at the Saudi con­sulate in Is­tan­bul in Oc­to­ber. Mr. Trump has backed Saudi Crown Prince Mo­hammed bin Sal­man de­spite calls from many U.S. politi­cians to im­pose stiff sanc­tions on the king­dom.

The Saudi Oil Minister re­frained from an­swer­ing a ques­tion on whether the OPEC de­ci­sion might prompt Wash­ing­ton to with­draw sup­port, but said Saudi-U.S. re­la­tions were based on shared val­ues.

The OPEC deal had hung in the bal­ance for two days – first on fears that Rus­sia would cut too lit­tle, and later on con­cerns that Iran, whose crude ex­ports have been de­pleted by U.S. sanc­tions, would re­ceive no ex­emp­tion and block the agree­ment.

But af­ter hours of talks, Iran gave OPEC the green light and Rus­sia said it was ready to cut more.

Rus­sia gave a com­mit­ment to re­duce out­put by 228,000 b/d from Oc­to­ber lev­els of 11.4 mil­lion b/d, al­though it said the cuts would be grad­ual and take place over sev­eral months.

The coun­try’s En­ergy Minister, Alexan­der No­vak, said Rus­sian Pres­i­dent Vladimir Putin had dis­cussed an out­put de­crease with the Saudi Crown Prince.

Iraq, OPEC’s sec­ond-largest pro­ducer, pledged to cut 140,000 b/d. Mr. Falih said Saudi pro­duc­tion had dropped to 10.7 mil­lion b/d in De­cem­ber from 11.1 mil­lion in Novem­ber and was set to de­cline to 10.2 mil­lion bpd in Jan­uary.

Iran, Libya and Venezuela were ef­fec­tively given ex­emp­tions. Nige­ria, which has been ex­empt since the pre­vi­ous round of cuts in Jan­uary, 2017, agreed to par­tic­i­pate.

He­lima Croft, man­ag­ing di­rec­tor at RBC Cap­i­tal Mar­kets, said the deal ex­ceeded ex­pec­ta­tions.

“Hav­ing the next meet­ing in April will be im­por­tant for plan- ning pur­poses to speed the cy­cle up a bit,” she said. OPEC nor­mally meets once ev­ery six months.

“We don’t know what will Iran’s sanc­tions pic­ture look like. We don’t know the Ira­nian vol­umes which will be com­ing off the mar­ket,” Ms. Croft said.

But Bob McNally, pres­i­dent of U.S.-based Rap­i­dan En­ergy Group, said the de­tails of the cut were “fuzzy” and would likely re­sult in a lesser re­duc­tion than the head­line fig­ure.

“Pres­i­dent Trump will not be happy to see to­day’s head­lines, but how strongly he re­acts de­pends mainly on whether crude prices rise strongly as a re­sult in com­ing days and weeks.”

U.S. spe­cial rep­re­sen­ta­tive for Iran Brian Hook met Mr. Falih in Vienna this week, in an un­prece­dented de­vel­op­ment ahead of an OPEC meet­ing.

Saudi Ara­bia first de­nied the Hook-Falih dis­cus­sion took place but later con­firmed it.

“U.S. po­lit­i­cal pres­sure is clearly a dom­i­nant fac­tor at this OPEC meet­ing, lim­it­ing the scope of Saudi ac­tions to re­bal­ance the mar­ket,” said Gary Ross, chief ex­ec­u­tive of Black Gold In­vestors and a vet­eran OPEC watcher.

The price of crude has fallen al­most a third since Oc­to­ber as Saudi Ara­bia, Rus­sia and the United Arab Emi­rates raised out­put to off­set lower ex­ports from Iran.

Rus­sia, Saudi Ara­bia and the United States have been vy­ing for the po­si­tion of top crude pro­ducer in re­cent years. The United States is not part of any out­put­lim­it­ing ini­tia­tive be­cause of its an­titrust leg­is­la­tion and frag­mented oil in­dus­try.

On Thurs­day, U.S. gov­ern­ment fig­ures showed the coun­try had be­come a net ex­porter of crude oil and re­fined prod­ucts for the first time on record, un­der­scor­ing how the surge in pro­duc­tion has al­tered the sup­ply equa­tion in world mar­kets.

Saudi En­ergy Minister Khalid al-Falih told re­porters the king­dom was ready to pump more should a ma­jor sup­ply out­age oc­cur.


Rus­sian En­ergy Minister Alexan­der No­vak, left, Saudi En­ergy Minister Khalid al-Falih, cen­tre, and United Arab Emi­rates En­ergy Minister Suhail Mo­hamed al Mazrouei speak to re­porters af­ter a meet­ing of the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries in Vienna on Fri­day.

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