OPEC’s 14 oil producing nations agreed on Wednesday to modestly cut their collective oil output later this year in an effort to bolster sagging prices, according to a cartel official. The decision sent global oil prices soaring by more than 5 percent.
Under the agreement, reached in Algiers, cartel members would decide at the group’s next formal meeting, on Nov. 30 in Vienna, on details of trimming production by up to 700,000 barrels a day, from a current level of just over 33 million barrels a day.
But that cut would represent less than 1 percent of total global production from all sources, barely reducing an oil glut that has driven down prices. The agreement at this stage does not set production target levels for each country — potentially giving leeway to Saudi Arabia and other producers that have spare well capacity, energy experts say.
Despite the deal’s limitations, the news buoyed markets. This is the first time the organisation of the Petroleum Exporting Countries has decided to cut production since the last oil price slump during the financial crisis eight years ago. The current price collapse, now two years old, has been more persistent. And it was largely spurred by an OPEC decision in November 2014 not to cut production in response to the global glut.
Wednesday’s decision was at least a partial reversal of OPEC’s previous decision to keep pumping — a policy that was originally intended to keep pressure on higher priced producers like the United States and Canada. Despite the price slump, shale production in the United States has been surprisingly resilient, as companies cut exploration and production costs.
OPEC also seems to be backing away from its previous insistence that other producers, notably Russia, share in any reductions.
In a statement, OPEC said on Wednesday that it had concluded that the market glut was not going away any time soon. “It is not advisable to ignore the potential risk that the present overhang may continue to weigh negatively well into the future,” the group said.
While the OPEC agreement may strengthen oil prices in the short term, it probably will have little long-term effect. It comes at a time when seasonal oil demand, particularly in the United States, decreases during the winter months, when people drive less. And like some other OPEC supply agreements in the past, it may not hold or it may be subject to cheating.
“It’s been a while since they even came to an agreement on reducing output, so that is important — but the actual implementation is still ahead, and that is always uncertain,” said Michael Lynch, president of Strategic Energy & Economic Research who has been an adviser to OPEC in the past.
Still, the agreement signals that Saudi Arabia, the dominant OPEC member, wants to keep oil prices from further weakening. Its 2016 government budget deficit is projected to nearly equal last year’s total of $98 billion, forcing the country to cut social spending and borrow on international credit markets.
Iran, Saudi Arabia’s primary rival for global markets, has long argued that it should be allowed to increase production after years of international sanctions that were lifted in January. Also earlier this year, the Saudis scuttled an OPEC attempt to freeze production because Iran declined to participate.
The November target date of the new agreement gives Iran time to increase production by several hundred thousand barrels a day from current levels.
It is possible for OPEC to decrease production as a group even as Iran continues pumping at growing rates, because of problems in some other member countries. Rebels in Nigeria continue to attack pipelines and other petroleum facilities, and Venezuela’s production is falling month after month as political turmoil roils that country.
The agreement appeared to reflect a broad concern among member countries that oil prices could be soft for a long time. That has long been the argument of Venezuela, Algeria and Ecuador. But Saudi Arabia and its Persian Gulf allies have been content to let the low prices force higher-cost American, Canadian and Brazilian producers to cut output.
“There is a common understanding that we need to look at market stabilization measures aimed at reducing the length of the downturn,” the Qatari energy minister, Mohammed bin Saleh al-Sada, who is also the OPEC president, said earlier on Wednesday. “We just need to find an understanding.”
Source: New York Times
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