Oil prices surged overnight as OPEC and some other producers agreed the first supply cut since the GFC eight years ago after Saudi Arabia and its Gulf allies accepted big production cuts and Iran agreed to freeze output.
But the surge stalled around a 9% rise and prices settled at their highest level for just five weeks in Europe and the US (since October 27).
That’s despite Iran being allowed to lift production to just under 4 million barrels a day, before cutting it to just under 3.8 million barrels.
According to media reports non-OPEC Russia will also join output reductions for the first time in 15 years to help the Organisation prop up oil prices and the struggling economies of its members (because that is what this cut is all about).
Brent crude futures jumped over 9% to more than $US50 a barrel as news of the prospective deal emerged from the OPEC meeting in Vienna overnight. US crude futures were also up more than 9% to $US49.44. US prices rose around 5.3% in November simply because of the overnight gain.
Without it they would have been down at least 4%, and probably double that or more without the agreement struck overnight.
Gold though suffered – falling more than 1% to just over $US1,170 an ounce, its lowest since early February.
OPEC produces a third of global oil, or around 33.6 million barrels per day, and under the Wednesday deal it would reduce output by around 1.2 million bpd from January 2017. Reuters reported that Saudi Arabia will take the burden of the cuts by reducing output by almost half a million barrels a day (bpd) to 10.06 million bpd. Its OPEC allies – the United Arab Emirates, Kuwait and Qatar – will cut by a combined 300,000 bpd and Iraq, which needs as much cash as possible for its war against ISIS, unexpectedly agreed to reduce production by 200,000 bpd.
And, OPEC leaders said non-OPEC producers had agreed to reduce output by a further 600,000 bpd, of which Russia would contribute a reported cut of 300,000. Russia, which had long resisted cutting output, but was OK with a freeze, pushed its production to new record highs in recent months.
A combined output reduction of 1.8 million bpd by OPEC and non-OPEC represents almost 2% of global output and would help the market clear a stocks overhang, which had sent prices crashing to around $US28 a barrel earlier this year, from levels as high as $US115 a barrel seen in mid-2014.
Non-OPEC Azerbaijan and Kazakhstan have said they might also cut, but that’s no certainty, leaving 300,000 barrels unaccounted for.
OPEC suspended Indonesia’s membership on Wednesday since the country, a net importer, could not cut output. It produces 700,000 barrels a day, and wasn’t included in the freeze. Iran is expected to freeze production at about 3.8 million barrels a day, close to its current rate, according to third-party assessments used by the group (and which will be vital to ensuring a higher level of transparency on this deal than on those in the past.
OPEC will hold talks with non-OPEC producers on December 9. The organisation will also have its next meeting on May 25 to monitor the deal and could extend it for six months, officials said.
