Non-Opec countries agree to cut oil output to ease glut
Oil-producing nations that do not belong to the Opec cartel have agreed to cut output by 562,000 barrels a day, Opec sources have said. This event caused a wide resonance in the Western media.
The Guardian writes that The agreement would be the first between the two groups since 2001 to jointly limit oil output. It aims to ease a global glut after more than two years of low prices that have overstretched many governments’ budgets and spurred unrest in some countries. Last week Opec agreed to slash output by 1.2m barrels a day to 32.5m from 1 January, with top exporter Saudi Arabia cutting as much as 486,000 barrels a day. Before talks in Vienna on Saturday, the Opec secretary-general, Mohammed Barkindo, said a deal would boost the global economy by sending prices higher and therefore helping some rich countries tackle low inflation. 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 $50 per barrel – and sometimes even below $30 – from as high as $115 in mid-2014 has helped reduce growth in US shale. However, it also hit the revenues of oil-dependent economies including Saudi Arabia and Russia, prompting the two biggest crude exporters to start their first oil cooperation talks in 15 years.
The talks on Saturday were attended by or had comments or commitments sent from non-Opec members Azerbaijan, Bahrain, Bolivia, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Sudan and South Sudan. Many non-Opec countries such as Mexico and Azerbaijan face a natural drop in oil production, and some analysts expressed doubts that those declines should be counted as cuts. Focus will now turn to compliance with the agreement, particularly as Opec has a long history of cheating on output quotas.
Gary Ross, an oil industry commentator and founder of the consultancy Pira Energy, said: “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.” He said he expected Russia to curtail output in line with its pledge of 300,000 barrels a day. Opec would target an oil price of $60 a barrel as anything higher could encourage rival production, Ross added.
As Middle East Eye writes, with the deal finally signed after almost a year of arguing within the Organization of the Petroleum Exporting Countries and mistrust in the willingness of non-OPEC Russia to play ball, the market's focus will now switch to compliance with the agreement. OPEC has a long history of cheating on output quotas. The fact that Nigeria and Libya were exempt from the deal amid production-denting civil strife will further pressure OPEC leader Saudi Arabia to shoulder the bulk of supply reductions. Russia, which 15 years ago failed to deliver on promises to cut output in tandem with OPEC, is expected to perform real 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 agreement cements and prepares us for long-term cooperation," Saudi Energy Minister Khalid al-Falih told reporters after the meeting, calling the deal "historic". Russian Energy Minister Alexander Novak told the same news conference: "Today's deal will speed up the oil market stabilization, reduce volatility, attract new investments."
On Saturday, producers from outside the 13-country group agreed to reduce output by 558,000 bpd, short of the initial target of 600,000 bpd, but still the largest contribution by non-OPEC ever. Of that, Russia will cut 300,000 bpd. "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. Amrita Sen from consultancy Energy Aspects said: "Compared to two months ago when the prospects of a deal were fading rapidly, this is a huge turnaround. Skeptics will argue about compliance but the symbolism in itself cannot be understated." Ross added that OPEC would target an oil price of $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 $50 per barrel - and sometimes even below $30 - from as high as $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, prompting the two largest exporters of crude to start their first oil cooperation talks in 15 years. Industry sources said Oman and Kazakhstan had yet to inform their foreign partners on joint oilfields about possible output cuts. Kazakhstan said on Saturday it would try to reduce output by 20,000 bpd next year. "While a lot of the countries are formalizing natural declines, cuts by Russia, Kazakhstan and Oman are real. Russia and Kazakhstan were between them expected to add 400,000 bpd to production next year," Sen of Energy Aspects said.