OPEC deal to cut output a bright spot

The OPEC agreed on Wednesday to cut the crude output to end the global oil glut. The oil cartel defied expectations and nailed down its first joint output cut since 2008 after tough talks in Vienna. The cuts are intended to shrink the world’s bloated oil stockpiles back to a normal level, paving the way for prices to rise to more than $60 a barrel. The impact on the energy world was immediate. The benchmark oil prices gained as much as 10 percent in New York and the share prices of energy companies around the globe jumped alongside the currencies of large exporters.
It is the culmination of a preliminary deal struck in September in Algeria when OPEC agreed to cut production but left the details to clear up later.
The accord announced by the Organization of the Petroleum Exporting Countries is aimed at reducing a global glut that has kept prices painfully low. It represents dramatic reversal from OPEC previous stance of flooding the market to force out rivals.
The cartel will lower its monthly output by 1.2 million barrels per day (bpd) to 32.5 million bpd from January 1. This is a major step forward and we think this is a historic agreement, which will definitely help rebalance the market and reduce the stock overhang.
The deal will help global inflation accelerate to a ‘more healthy rate’, including in the United States. Saudi Arabia will reduce output by 486,000 bpd from October levels to 10.1 million bpd. Iraq will cut by 210,000 bpd to 4.4 million bpd. Baghdad had said it was short of money to fight IS group extremists, while Iran wants to hike output to levels before it was hit by Western sanctions over its now-reduced nuclear programme. The UAE 139,000 to 2.9 million bpd. Iran will actually increase production by 90,000 bpd to 3.8 million bpd under the deal. Libya and Nigeria are exempted, while Indonesia has suspended its membership.
On the other hand, non-OPEC member Russia is ready to cut its own oil production by 300,000.
Assuming non-OPEC countries do reduce by 600,000 bpd, this will take the total reduction in crude gushing into the market to 1.8 million bpd.
“OPEC’s adherence to the agreement will be critical, and its track record is poor—but for the time being oil prices have received a huge support. The group demonstrated more cohesiveness than at any point since cutting in 2008,” said Jason Gammel, an analyst at Jefferies Group LLC.
Oil companies were among the biggest winners on the UK’s FTSE 100 Index, with BP Plc rising as much as 4.2 percent and Royal Dutch Shell Plc adding as much as 3.2 percent. But the biggest winner, though, is China. Beijing is remain alert to the stability and diversity of its supply of commodities.
While consumers might not welcome the more expensive fuel that a deal would bring, OPEC members’ public finances have been shot to bits by two years of rock-bottom prices.
The low crude price has also hit investment in oil facilities, raising the prospect of oil shortages further down the line.
The economics of the deal are “incredibly appealing,” Jeff Currie, global head of commodities research at Goldman Sachs Group Inc., said. The main aim of the cuts is “inventory normalization,” he said.
The deal will bring global oil supply and demand back into balance early in 2017, faster than previously expected. This should be a wake-up call for skeptics who have argued the death of OPEC. The strength of the deal will depend on whether all parties deliver on their commitment. Saudi Arabia and its Gulf allies, the UAE and Kuwait, have traditionally stuck to their cuts, but some others haven’t, particularly when prices are low. Any doubt in the market could once again see prices come under pressure.