Opec and non-members reach deal on output cut

Focus now switches to compliance by non-Opec countries with pact

VIENNA • Opec and non-Opec producers have reached their first deal since 2001 to curtail oil output jointly next year and ease a global glut after more than two years of low prices.

With the deal finally signed yesterday in Vienna after almost a year of arguing within the Organisation of the Petroleum Exporting Countries (Opec) and mistrust in the willingness of non-Opec Russia to play ball, the market's focus will now switch to compliance with the agreement.

The pact involves a reduction of about 600,000 barrels a day from non-Opec countries, delegates familiar with the situation said, asking not to be identified before an official announcement due later.

The agreement represents the strongest effort yet by oil-rich countries, from giants such as Saudi Arabia and Russia to tiny producers including Bolivia and Equatorial Guinea, to end a market share war that has shaken investors, hit energy companies and damaged economies.

Russia, which 15 years ago failed to deliver on promises to cut in tandem with Opec, is expected to perform real output reductions this time. But analysts question whether many other non-Opec producers are attempting to present a natural decline in output as their contribution to the deal.

"This is a very historic meeting ... This will boost the global economy and will help some OECD countries to reach their inflation targets," Opec Secretary-General Mohammed Barkindo said ahead of the talks, referring to the Organisation for Economic Cooperation and Development, which groups most of the world's richest economies.

Opec agreed on Nov 30 to lower its monthly output by 1.2 million barrels per day to 32.5 million barrels per day from next month.

"They are all enjoying higher prices and compliance tends to be good in the early stages. But then as prices continue to rise, compliance will erode," said veteran Opec watcher and founder of Pira Energy consultancy Gary Ross.

Russia, he believed, would curtail output in line with its pledge of 300,000 barrels per day.

He added Opec would target an oil price of US$60 per barrel as anything above that could encourage rival production.

Oil prices have more than halved in the past two years after Saudi Arabia raised output steeply in an attempt to drive higher-cost producers such as US shale firms out of the market.

The plunge in oil to below US$50 per barrel - and sometimes even below US$30 - from as high as US$115 in mid-2014 has helped reduce growth in US shale output, but it also hit the revenues of oil-dependent economies, including Saudi Arabia and Russia.

Even so, the deal agreed on yesterday may not reduce global stockpiles fast enough to radically alter market dynamics, especially if compliance is patchy.

"Emotionally, the market will likely rally," said Mr Adam Ritchie, founder of AR Oil Consulting.

"But beyond rebalancing supply and demand, we have excess inventory that is astronomic that will continue to keep a lid on prices."


A version of this article appeared in the print edition of The Sunday Times on December 11, 2016, with the headline 'Opec and non-members reach deal on output cut'. Print Edition | Subscribe