Oil prices soar as producers agree to slash output

Eleven non-OPEC countries agreed to reduce the oil output: Azerbaijan, Kingdom of Bahrain, Brunei Darussalam, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Sultanate of Oman, the Russian Federation, Republic of Sudan, and Republic of South Sudan.

Prices at the pump are already elevated following recent OPEC production cuts. Africa-focused explorer Tullow Oil Plc advanced as much as 11 per cent and Italian oil major Eni SpA added as much as 4.6 per cent.

It is a delicate gambit that Saudi Arabia, the rest of OPEC and the 11 non-OPEC producers in the deal have embarked on. If all, or a clutch of these producers go for ramping up production in the hope of gaining market share, it will undermine the Saudi plan.

A soldier patrols in front of the Opec headquarters in Vienna November 29, 2016.

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 USA shale.

ANZ commodity strategist Daniel Hynes said full compliance of the 1.7 million barrels a day cut from the market will negate the impact of any increase from the U.S.in the short-term, as the USA has cut just 800,000 barrels a day in the last 12 months.

Besides, the latest OPEC agreement does not include Nigeria and Libya, because they have been exporting an extra 0.5 million barrels a day since October.

At a meeting in Vienna last week, the 14 members of the OPEC cartel agreed upon a deal to cut production as of January 1 by about 1.2 million barrels per day, or about 4.5 percent of current production, to 32.5 million barrels per day. A speculated spike in global prices of crude oil to $60 per barrel or more would end up as a double whammy for them, after the November 8 decision to demonetise high-value currencies (Rs 500 and Rs 1,000).

Oil prices have languished at less than or around $50 a barrel since the U.S. became largely self-sufficient on shale from 2014 onwards; but with Opec’s announcement that production would be cut on 30 November, prices recently surged more than 15 per cent, rising last week briefly above $55.

The agreement would be the first between the two groups since 2001 to jointly limit oil output. Technology is improving with shale every day, and so the cost of production is continuing to drop. It used to be able to control the oil prices and now it can’t.

However, exuberance over the deal, which follows a similar agreement by Opec producers two weeks ago, masks scepticism over its efficacy and longer-term impact on oil revenues.

Bolivia may also attend, OPEC officials said.