Oil producers in the OPEC cartel have agreed they need to cut production to address a supply glut and lift the low prices that have been causing big problems for their economies.
Point of view
There is an element of some scepticism as to whether these cuts will actually be implemented based on past eventsHead of Research, Wilson King Investment Management
OPEC will now talk with other producers – such as Russia – and negotiate how much less they will pump.
The president of the OPEC conference Mohammed Bin Salah al-Sada, who is also Qatar’s energy minister, said they are moving towards rebalancing the market: “We needed to accelerate this rebalancing process by sharing, if you like, the burden of adjusting the production within OPEC countries as well as those key non-OPEC countries who have already indicated their willingness to cooperate.”
The news boosted financial markets with a jump in energy companies’ shares. Among leading gainers, Tullow Oil rose nine percent, Statoil and Royal Dutch Shell rose more than five percent and Total added more than four percent.
Crude prices also surged by the most in more than five months.
But the devil is in the details and even with a target for cutting production, there will be much wrangling before OPEC’s November meeting when the deal is due to be finalised.
Richard Hunter, Head of Research at Wilson King Investment Management, pointed out: “There is an element of some scepticism as to whether these cuts will actually be implemented based on past events. And of course quite apart from that there’s the rather bigger question of those countries which aren’t in OPEC and whether they will be getting involved, most notably Russia.”
#Iraq would have to make the biggest #oil output reductions under announced #OPEC cuts, says
DeutscheBank</a> <a href="https://twitter.com/hashtag/Saudi?src=hash">#Saudi</a> <a href="https://twitter.com/hashtag/Iran?src=hash">#Iran</a> <a href="https://twitter.com/hashtag/Libya?src=hash">#Libya</a> <a href="https://twitter.com/hashtag/OOTT?src=hash">#OOTT</a> <a href="https://twitter.com/search?q=%24USO&src=ctag">$USO</a> <a href="https://t.co/Cp20nVBKLk">pic.twitter.com/Cp20nVBKLk</a></p>— Christopher Johnson (chris1reuters) September 29, 2016
No sooner had the announcement been made than Iraq – which is OPEC’s second largest producer – was quibbling about how the quotas would be calculated, while one OPEC source told Reuters: “The deal is a bit of a farce.”
The agreement means Saudi Arabia has failed in its aims.
It started raising output two years ago, along with other OPEC members, to drive down prices and push US shale oil producers out of the market.
Some have gone but most remain, and as prices rise they become more profitable to again challenge OPEC for market share.
Between now and November, when OPEC meets formally in Vienna, the group will have to overcome huge obstacles to agree a binding deal.
Key among them will be to establish at least some semblance of country quotas to make sure members limit global oversupply, which has helped halve prices since 2014 to below $50 a barrel.
Iran insists it wants to raise output to around four million barrels per day (bpd) as it emerges from international sanctions. The Saudis have proposed that Iran freeze production at 3.7 million bpd.
Riyadh is offering to cut its own production to 10.2 million bpd from 10.7 million.