The decision will impact everything including inflation rates in India, China and other consuming countries
LONDON • Saudi Arabia, Russia and the rest of the OPEC+ coalition delivered a bigger than expected oil production cut, sending prices soaring and defying US President Donald Trump’s calls for the cartel to keep the taps open.
After a fractious two-day meeting in Vienna, the group eventually agreed to remove 1.2 million barrels a day from the oil market in the first quarter of 2019 — more than 1% of global production — to revive prices.
Oil jumped as much as 6% last week, trading above US$63 (RM262.71) a barrel in London, as investors were forced to change their assessment of next year’s oil supply. The decision will impact everything from the share prices of Texas shale producers, which surged after the meeting, to inflation rates in India, China and other consuming countries.
The political implications are also profound: The deal is testament to the strength of Saudi Arabia’s two-year-long cooperation with Russia, a country that played a crucial role in brokering the pact, and showed Crown Prince Mohammed Salman is willing to defy the wishes of Trump even after the murder of Jamal Khashoggi in Istanbul.
“I’m sure oil and gas producers in the US are breathing a sigh of relief after the decision,” Saudi Oil Minister Khalid Al-Falih, said after the meeting, nodding to the upside of the decision for the US.
But Al-Falih went out of his way to show Riyadh is serious about keeping the market under control. Because the kingdom produced significantly over its OPEC commitments in November, it will cut production by 900,000 barrels a day by January to 10.2 million barrels a day, a dramatic swing very few analysts saw coming.
The Saudi output swing is equivalent to removing all the production of Libya in just eight weeks.
“This will be strongly felt in the spot oil market,” said SEB AB’s chief commodities analyst, Bjarne Schieldrop. “We are going up to US$70.”
Like many OPEC deals, muddy compromise was needed to get the deal over the line. Iran insisted on being exempted from the cuts because it’s subject to US sanctions, something Saudi Arabia resisted. In the end, Tehran got a verbal assurance it wouldn’t have to take part in the cuts. Venezuela and Libya were also exempted.
“A very interesting word called exemption,” Nigerian Oil Minister Emanuel Kachikwu said. “That was the key sticking point”
Before the meeting, many OPEC watchers had predicted a maximum cut of one million barrels a day, others fretted Saudi Arabia would balk at any deal for fear of offending the White House. Al-Falih himself warned after the first day of talks that he wasn’t confident of getting a deal.
The breakthrough followed a series of bilateral meetings convened by Russia, which brokered the compromise between arch rivals Saudi Arabia and Iran — a mediator role that showed the growing influence of the Kremlin inside OPEC, unthinkable only two years ago.
“Given how much expectations were downplayed around the outcome of this meeting, this result comes as a welcome surprise,” said Harry Tchilinguirian, head of commoditymarkets strategy at BNP Paribas. “OPEC has given the oil market a rudder that appeared largely absent yesterday.”
Although the group won’t publish individual quotas, this is how the deal will work.
Producers will use October output levels as a baseline for cuts and the agreement will be reviewed in April, when ministers meet again in Vienna. On average, that means a cut of 3% for OPEC countries who aren’t exempted.
Russia proposed its own contribution would be equivalent to a 2%, according to one delegate. Such a cut would equate to 228,000 barrels a day, Novak said, higher than its initial pitch for no more than 150,000 barrels a day.
“I’m confident that our resolve, that our professionalism and our willingness to achieve results is as strong as ever,” Russian Energy Minister Alexander Novak said of the so-called OPEC+ coalition. “In current conditions, it’s extremely important to send a strong signal to the market.”
Much has changed for OPEC since 2016, when Russia and Saudi Arabia ended their historic animosity and started to manage the market together. The alliance has transformed the cartel into a duopoly in which the Kremlin is asserting its power.
OPEC has scheduled its next meeting for April 2019, earlier than usual. It coincides with the expected tightening of US sanctions on Iran when the waivers granted by Washington to several Asian consumers need to be renewed. — Bloomberg