OPEC springs a surprise, agrees to cut oil output

Posted by News Express | 29 September 2016 | 2,070 times

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Oil cartel OPEC shocked markets with a deal to cut oil output after kingpin Saudi Arabia allowed bitter rival Iran to be exempted, but analysts warned on Thursday the move was unlikely to have a lasting effect.

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-million to 33-million barrels a day from the 33.47-million in August, the International Energy Agency said.
With strict implementation of the deal, it could add $7-$10 to oil prices in the first half of 2017, Goldman Sachs said.
“Longer term, we remain skeptical on the implementation of the proposed quotas, if ratified,” the analysts said.
“If this proposed cut is strictly enforced and supports prices, we would expect it to prove self-defeating medium term with a large drilling response around the world,” the Goldman analysts said.
Société Générale analyst Michael Wittner termed the deal a “big surprise”, and said the agreement would be added to the bullish side of the ledger.
“Ongoing uncertainty about the deal, and associated developments and news flow, will contribute to continued high volatility in the next two months,” Wittner said.
“We believe that oil market participants will now be much more reluctant to establish a significant short position for crude oil.”
The deal, reached 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.
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,” OANDA senior market analyst Jeffrey Halley told AFP.
“We shouldn’t underestimate the major shift by Saudi Arabia,” he said.
“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, the Middle East’s foremost Shiite and Sunni Muslim powers, are at odds over an array of issues, including the wars in Syria and Yemen.
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 November 30.
The cartel’s richer members, particularly the Gulf states, had preferred to battle it out with non-Opec producers such as the US for global market share by keeping production high.
Its refusal to make cuts in the past – despite a painful supply glut and weak demand – had contributed to a slump in prices from more than $100 a barrel in June 2014 to near 13-year lows of below $30 in early 2016.
But Halley said: “Saudi Arabia have perhaps reassessed their dumping oil strategy to put US shale out of business as the pressure on their budgets has clearly reached a tipping point as well.”
The plunge in oil revenues has left Saudi Arabia with a record deficit last year, prompting the country to cut the salaries of cabinet ministers and freeze the wages of lower-ranking civil servants.
“Many OPEC members are suffering economically from low prices. Their economies are stagnating or going backwards and they face budgetary issues,” said Greg McKenna, chief market strategist at forex broker AxiTrader.
“So it appears the fiscal imperative seems to have trumped OPEC’s internal politics. That means I do think this move in prices and the promised reduction will be sustained,” he told AFP.
Other analysts said the market was likely to be cautious until the details of the deal were worked out, while traders would also be watching whether non-Opec producers such as Russia, the US and Canada will also make cuts.
The announcement was immediately cheered on oil markets, with West Texas Intermediate (WTI) soaring more than 5% and Brent tacking on almost six%. But at around 5am GMT Thursday in Asia, US benchmark WTI was down 7c at $46.98 and Brent was down 18c to $48.51.
“There has been no agreement for the last eight years and understandably some will remain skeptical,” said CMC Markets analyst Alex Furber.
“There is also the wider consideration of whether non-OPEC members, in particular Russia, will co-operate,” he told AFP.
“They are pumping at record post-Soviet levels so there is plenty of supply still out there. This would suggest that the outlook is still quite bearish at present.”
•Source: AFP and Reuters via Business Day South Africa.

Source: News Express

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