OPEC Agrees on Modest Oil Output Cuts

OPEC has agreed to reduce output to a range of 32.5-33 million barrels per day from its current output of 33.24 million bpd
Goldman Sachs said the OPEC deal should add $7 to $10 to oil prices in the first half of next year.Goldman Sachs said the OPEC deal should add $7 to $10 to oil prices in the first half of next year.

OPEC agreed on Wednesday modest oil output cuts in the first such deal since 2008, with the group's leader Saudi Arabia softening its hawkish stance on pumping extra barrels amid mounting pressure from low oil prices.

"OPEC made an exceptional decision today ... After two and a half years, OPEC reached consensus to manage the market," said Iranian Oil Minister Bijan Zanganeh, who had repeatedly clashed with Saudi Arabia during previous meetings.

He and other ministers said the Organization of the Petroleum Exporting Countries would reduce output to a range of 32.5-33 million barrels per day, news outlets reported. OPEC estimates its current output at 33.24 million bpd.

"We have decided to decrease the production around 700,000 bpd," Zanganeh said in Algiers, the venue of the meeting. The move would effectively re-establish OPEC production ceilings abandoned a year ago.

However, how much each country will produce is to be decided at the next formal OPEC meeting in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia.

The Iranian minister noted that OPEC has decided to set up a high-profile specialized committee that will suggest its proposal on the members’ oil production level during the organization’s next meeting, Shana reported.

He also stressed that the committee will negotiate with non-OPEC producers, such as Russia, to stabilize the oil market.

Traders Impressed

Brent crude settled up $2.72, or 5.9%, at $48.69 a barrel, hitting a more than two-week high of $48.96. Many traders said they were impressed OPEC had managed to reach a compromise after years of wrangling but others said they wanted to see the details.

The top Iranian oil official said that reaching an agreement between all OPEC-members and some non-OPEC producers “is vital to overcome problems.”

“We expect OPEC states to support Iran’s comeback to the oil market after international sanctions against it were lifted,” Zanganeh noted.

Zanganeh told Iranian state-TV on Thursday by phone that in spite of disagreements inside OPEC, it made the decision, which is a success for the organization. “Many said OPEC is dead, but the decision indicated it is alive and can decide to the benefit of its members in critical conditions.”

In addition, he pointed that Saudi Arabia and Russia are ready to cut oil production.

"This is the first OPEC deal in eight years. The organization proved that it still matters even in the age of shale! This is the end of the ‘production war' and OPEC claims victory," said Phil Flynn, senior energy analyst at Price Futures Group.

Saudi Energy Minister Khalid al-Falih said on Tuesday that Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense" as part of any output limits.

That represents a strategy shift for Riyadh, which had said it would reduce output to ease a global glut only if every other OPEC and non-OPEC producer followed suit. Iran has argued it should be exempt from such limits as its production recovers after the lifting of international sanctions earlier this year.

----- Price Pressures

Saudi Arabia is by far the largest OPEC producer with output of more than 10.7 million bpd, on par with Russia and the United States. Together, the three largest global producers extract a third of the world's oil.

Iran's production has been stagnant at 3.6 million bpd in the past three months, close to pre-sanctions levels although Tehran says it wants to ramp up output to more than 4 million bpd when foreign investments in its fields kick in.

Saudi oil revenue has halved over the past two years, forcing Riyadh to liquidate billions of dollars of overseas assets every month to pay bills and cut domestic fuel and utility subsidies last year.

Oil prices are well below the budget requirements of most OPEC nations.

OPEC sources have said Saudi Arabia offered to reduce its output from summer peaks of 10.7 million bpd to around 10.2 million if Iran agreed to freeze production at around current levels of 3.6-3.7 million bpd.

Riyadh has raised production in recent years to compete for market share while Iran's output was limited by sanctions. Zanganeh has said Iran wanted an output cap of close to 4 million bpd. Saudi output drops in winter when it needs less fuel than during summer, when cooling requirements spike.

----- $7-$10 Oil Price Rise Forecast

According to American banking firm Goldman Sachs Group Inc., the deal reached by OPEC crude producers should add $7 to $10 to oil prices in the first half of next year.

"Strict implementation of today's deal in 2017 would represent 480,000 to 980,000 barrels per day less output," Goldman analysts said.

"Longer term, we remain skeptical on the implementation of the proposed quotas, if ratified," the analysts said.

Still, Goldman kept its end-2016 forecast for U.S. West Texas Intermediate crude (WTI) at $43 per barrel and its 2017 forecast at $53 per barrel.

"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.