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Saudi Arabia’s energy minister, Khalid al-Falih, speaks to journalists in Vienna on Thursday.
Saudi Arabia’s energy minister, Khalid al-Falih, speaks to journalists in Vienna on Thursday. Photograph: Joe Klamar/AFP/Getty Images
Saudi Arabia’s energy minister, Khalid al-Falih, speaks to journalists in Vienna on Thursday. Photograph: Joe Klamar/AFP/Getty Images

Oil prices recover as Opec and allies agree to cut output

This article is more than 5 years old

Reduction of 1.2mb/d agreed at Vienna meeting likely to stabilise prices, say observers

Oil prices have rallied as the world’s major producers agreed a deeper-than-expected cut in output on Friday, recovering the losses of the previous day, when oil-rich states failed to reach a deal.

Opec and allies including Russia, which together account for half of the world’s oil production, have committed to reducing output by around 1.2mb/d a day.

The price of international benchmark Brent crude has plunged by a third since the start of October to about $60 a barrel due to fears that the market is oversupplied.

But prices bounced up nearly 3% on Friday to $62.92 a barrel after the oil cartel and its partners reached a deal.

At a meeting in Vienna this week oil ministers have been trying to plot a course between protecting their revenues and avoiding angering the US president, Donald Trump, who has urged Opec against stopping the oil flowing and pushing prices higher.

Observers said the deal, which at one point appeared it might founder due to Iran’s demand for exemptions from the cuts, looked like it would cause prices to stabilise rather than spike.

“It looks supportive for oil prices. It will help the market deal with the strong US supply growth we are expecting next year of 1.8mb/d year on year. It leaves room for an increase [in prices too],” said Ann-Louise Hittle of oil and gas analysts Wood Mackenzie.

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What is Opec?

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Founded in 1960, the cartel of the world’s biggest oil producers emerged as a political and economic force with the 1973-74 US oil embargo, which caused oil prices to spike. The club consists of 13 countries, with Saudi Arabia the biggest producer, followed by Iraq and Iran.

In response to the 2014-16 oil price slump, Opec partnered with Russia in December 2016 to agree a cut in production of 1.8m barrels a day. That curb, the first of its kind in 15 years, drove up the price of oil. In May 2017, the cuts were extended until the end of March 2018.

Opec's official members are: Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Republic of the Congo, Saudi Arabia, the United Arab Emirates and Venezuela. Indonesia and Qatar's membership has lapsed.

The Opec+ group, sometimes known as "Vienna Group", adds 10 non-member nations, including Kazakhstan, Mexico and Russia. Between them these nations supply 55% of oil production and hold 90% of the planet's oil reserves.

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However, experts were split on how much prices might rise by. Hittle and Investec bank said Brent could return to $70 a barrel next year, while others said a bigger cut was required to reach that level.

Neil Wilson, chief market analyst at Markets.com, said: “It’s probably a little better than the market had been expecting, but not by a lot. I’d still say that a deeper cut would be needed to really see oil rally back to $70.”

The deal is likely to stabilise prices at between $60 and $65 a barrel, said financial services firm Cantor Fitzgerald Europe.

Russia was reluctant to reduce output at the meeting. But it has agreed to shoulder more of the burden than expected, at about 17% of the total cut, with a similar amount covered by other non-Opec partners, and the oil cartel making up the rest. Iran was granted the exemption it had sought.

The cuts will take place from the start of the new year, measured against a baseline of October. Opec’s de facto leader, Saudi Arabia, said its production would fall from 10.7mb/d in October and 11.1mb/d in November to 10.2mb/d in January.

“This is partly driven by our commitment to start on the right foot in 2019 and to demonstrate that delivering on this agreement will not take a long protracted period of gradually winding down,” said the Saudi energy minister, Khalid al-Falih.

The US and Saudi Arabia are pumping record amounts,which together with US waivers on its sanctions on Iranian exports, has led to a glut of crude.

Experts believe the US will increase production by a tenth next year, as shale operators ramp up. American oil now accounts for more than one in 10 barrels of world crude production.

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