OPEC agrees to cut output in bid to push up oil price

VIENNA (AFP/AP) – The Organization of the Petroleum Exporting Countries (OPEC) oil cartel defied expectations Wednesday and nailed down its first joint output cut since 2008 after tough talks in Vienna, sending oil prices soaring.

At 1622 GMT Brent North Sea crude for January delivery was up $3.77 at $50.15, the first time it has risen above $50 in a month. West Texas Intermediate was up $3.98 at $49.21.

The accord announced by the Organization of the Petroleum Exporting Countries is aimed at reducing a global supply glut that has kept prices painfully low.

The move also effectively scraps its strategy of squeezing US competition through high supply that had backfired by lowering prices and draining the cartel’s own economies.

The reduction of 1.2 million barrels a day is significant, leaving OPEC’s daily output at 32.5 million barrels.

OPEC President Mohammed Bin Saleh Al-Sada said non-OPEC nations are expected to pare an additional 600,000 barrels a day off their production.

The combined cut will result, at least in the short term, in somewhat more pricey oil — and, by extension, car fuel, heating and electricity. The international benchmark for crude jumped 8.3 percent, or $3.86, to $50.24 on Wednesday.

In the longer term, however, analysts say it’s highly unlikely that oil will return to the highs of around $100 a barrel last seen two years ago. That’s partly due to the fact that President-elect Donald Trump has promised to free up more oil drilling in the US, which would increase global supply. Demand is also not recovering as the world economy sags.

Paying tribute to “a historic moment,” Al-Sada said Wednesday’s move “will definitely balance the market and help (in) reducing the stock overhang.”

Al-Sada said the OPEC cutback is to take effect Jan. 1, with consultations planned on the exact timing of the nonOPEC reductions. Russia alone is committed to taking 300,000 barrels a day off the market.

With the production cut, OPEC will not only benefit from gaining more dollars per barrel. It can also lay claim once again to playing a part in influencing world prices.

And its tentative alliance with Russia and other non-OPEC nations may give it — and them — additional clout in future competition for market share with US producers, which are sure to return in increasing numbers if crude prices move upward.

Wednesday’s decision was a departure from years of infighting among members refusing to give up their market share and a resulting series of inconclusive meetings.

In another reflection of new-found discipline within the cartel, Al-Sada said Indonesia’s membership had been suspended after it refused to accept its share of proposed output cuts, reducing the number of OPEC countries to 13.

Part of the focus following Wednesday’s decision is how well it holds. OPEC gave up assigning quotas in part because members have ignored them in their quest for petrodollars.

But officials were displaying new confidence. In comments addressed to naysayers about his organization’s relevance, Al-Sada said its decision “means the weight of OPEC and the resiliency of OPEC are still there and it will continue to be there.”

“Today’s unity is a very explicit sign about the position of OPEC,” he added.

Meetings to turn the planned nonOPEC cuts into reality are planned next month in Doha. From Moscow, Russian Energy Minister Alexander Novak confirmed his country’s readiness to pare 300,000 barrels from its output, adding that it would happen gradually “within a short period of time based on technical capacity.”

Al-Sada said the OPEC cutbacks are in effect for six months with the option of renewal after a review by a five-nation committee set up to monitor compliance.

Still, analysts suggested price upswings would be relatively moderate – and the fallout minimal, at least for the United States. Sal Guatieri, senior economist at BMO Capital Markets, said oil should rise to an average $53 a barrel next year.

For the US economy, that’s “a sweet spot ... a high-enough price to spur investment in the energy industry but not enough to seriously drain purchasing power” of consumers, he said.

“The losers are Europe and Japan – oil-importing regions of the world” with barely growing economies, said Guatieri.

One of the biggest hurdles to Wednesday’s deal had been a rivalry between Saudi Arabia and Iran, whose struggle for dominance in the Mideast is also playing out in the Organization of the Petroleum Exporting Countries.

The Saudis had long been hesitant to shoulder the lion’s share of a cut, while Iran had resisted reducing its own production. It argued that it has yet to recover its output levels hit by years of sanctions and that the onus was on the desert kingdom to pare back the most.

Reflecting their compromise, documents from the meeting showed the Saudis committed to chopping 486,000 barrels off the 10.544 million barrels they were pumping as of October. Iran’s quota was set at 3.797 million barrels a day, down 90,000 barrels from October.

All other members cut as well, ranging from tiny Gabon’s 9,000 barrel reduction to an Iraqi drop of a daily 210,000 barrels. Non-member Russia was producing over 11 million barrels a day in October.