OPEC agrees to deal to cut oil output

The cartel, whose members have been hit by depressed oil prices because of excess global production, overcame long-running disagreements and agreed in principle to limit production to between 32.5 million and 33 million barrels per day.

“I am very optimistic that major non-OPEC producing countries, such as the Russian Federation, will also take part in this joint effort of OPEC countries”.

A source familiar with Iranian thinking said it was still positive that an agreement had been reached: “No one will offer anyone a free ride”. Details will be finalized at OPEC’s policy meeting in November, group officials said.

The agreement was adopted Wednesday in Algiers at an informal meeting of the Organization of Petroleum Exporting Countries and must be endorsed in Vienna at a formal meeting of the organization on November 30. The deal would need to be agreed to by OPEC members at their planned Vienna meeting in November.Producers like Venezuela and Nigeria face tremendous economic pain as oil prices remain low. The global benchmark crude closed at a $1.41 premium to WTI. Oil prices shot up by around 5 percent in the wake of the cut.

Nigeria, Iran and Libya have said they are exempt from an agreement the Organization of Petroleum Exporting Countries announced on September 28 to cut supply, while Iraq has said it doesn’t accept OPEC’s estimates of its production levels.

The impact was clear: USA oil production fell by 12.5 percent, or 1.2 million barrels a day.

“On our numbers, OPEC’s announced production target range can be viewed more as a “freeze” of production levels rather than a ‘cut.’ Based on Rystad Energy estimates, current OPEC production in August was in the middle of the stated range”.

U.S. crude was down 6 cents at US$47.77 a barrel, also about 6 per cent higher than before the Opec deal. OPEC now faces the challenge of implementing the cuts, with Goldman Sachs Group Inc. and Morgan Stanley expressing skepticism that the deal can be completed. Brent crude, the global standard, shed 20 cents to $48.49 a barrel in London. Royal Dutch Shell Plc climbed 6.6 percent Thursday, the most since December 2008, while BP Plc rose 4.3 percent.

“It definitely was a surprise”, said Daniel Katzenberg, an analyst with Baird. Most analysts discounted the move as verbal intervention bolstering OPEC’s influence more than an actual market adjustment.

More importantly, after two years of high supply and low prices, it appears that OPEC has thrown in the towel and don’t want to fight with USA shale suppliers anymore.