OPEC, Russia Agree To Cut Oil Output

By Glenn Dyer | More Articles by Glenn Dyer

So will the latest attempt by OPEC and Russia to put a line under global oil prices work?

OPEC announced Friday that it will reduce overall production among its members by 800,000 barrels a day from October’s levels for six months, starting from January.

The statement may have been written on Thursday, the day of the OPEC meeting because didn’t specify the output cut by nonmembers, which include Russia. But reports put the non-member cuts at 400,000 barrels a day (with most of the cut falling to Russia) to bring the total reduction to 1.2 million barrels a day.

On Friday, January WTI crude rose 2.2% to settled at $5US2.61 a barrel, while February Brent crude finished at $61.67, up 2.7%. They were up 3.3% and 3.6% respectively for the week.

The catalyst for the latest cap was illustrated by the fall in the price of Brent crude from a settlement of $US86.29 on October 3 to a more than one-year low of $US58.71 on November 30. US West Texas Intermediate slumped to $US50.29 in late November as well to (its lowest since October 2017), from $US76.41 in early October.

Obviously something had to be done (from OPEC’s point of view), but the question is whether this cap will do it, or will a further slowing in the pace of global economic activity (the US, China, and Europe especially) undermine it by leaving more surplus crude in the market in early 2019.

The Financial Times reported “Opec delegates said the deal was aimed at damping concerns about an emerging supply glut that has pushed prices 30 percent lower in the past two months. Ann-Louise Hittle at consultancy Wood Mackenzie said the cuts, which are bigger than some analysts had expected, would “help tighten the market by the second half of next year.”

“The higher volume cut agreed is in line with what traders and analysts said would be necessary to balance supplies with demand next year. The cuts will be taken from October production levels and will last for six months. The breakdown between each country will not be disclosed to the oil market, delegates said, in a sign of the tensions in the alliance.”

Media reports said Iran was initially asked to make a “symbolic” cut, even though its exports have fallen due to US-imposed sanctions starting last month. But it ended up winning an exemption from the broad agreement. Libya and Venezuela, which have seen drastic fall-offs in production due to internal strife, were also granted an exclusion.

That means the actual cuts will be bigger than 1.2 million barrels a day to compensate for the lack of any cuts for Iran, Libya, and Venezuela, with Saudi Arabia wearing most of the reduction.

Russian energy minister Alexander Novak told the media that it was important for producers to send a “strong signal” to the market.

“[We have] shown that we can react to oil market challenges both on the way up and the way down,” Mr. Novak said of the joint cuts that have been in place since 2016,” he said.

Meanwhile, there was another bit of news that tells an intriguing story about the health of the US oil market, now the world’s biggest producer at 11.7 million barrels a day.

The weekly rig use report from services group, Baker McKenzie revealed that US energy companies cut 10 oil rigs in the week to December 7, the biggest weekly decline since May 2016, bringing the total count down to 877.

With more than half the total US oil rigs in the Permian Basin, the country’s biggest shale oil formation the number of active rigs there declined by four to their lowest since early November.

The question now analysts say – is this a one-off cut or an early tip that the 30% slide in prices has forced some shale companies to haul back on activities.

Last week’s active rig use number was still sharply higher after the drop higher than a year ago when 751 rigs were active as energy companies have stepped up drilling to try and catch the rise in prices earlier in the year.

Year-to-date, the total number of oil and gas rigs active in the United States has averaged 1,029. That keeps the total count for 2018 on track to be the highest since 2014, which averaged 1,862 rigs.

The US government projected average annual US production will rise to a record high 10.9 million bpd in 2018 and 12.1 million bpd in 2019 from 9.4 million bpd in 2017. Production is running at around 11.7 million barrels a day according to the US Energy Information Administration.

Comex gold futures settled Friday at their highest level since July, notching up their biggest weekly gain since August following last week’s market turmoil that sent share prices sliding and pushed US bond yields well under 3% (2.86% on Friday).

Comex gold for February delivery on Comex rose $US9, or 0.7%, to settle at $US1,252.60 an ounce.

For the week, gold was up 2.2%, which was the biggest such gain since a 2.5% rise in the week ended August 24, according to FactSet data.

Gold also settled at its highest since July 10, trimming its year-to-date loss to less than 5%.

In other metals trade, Comex March silver gained 1.3% to $US14.696 an ounce. It was up roughly 3.4% for the week, but is still down more than 14% year to date.

Comex March copper rose 0.6%, to $US2.76 a pound—down about 1% for the week.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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