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OPEC Agrees on Need to Cut Oil Output
Group to finalize plan in November
ALGIERS, Algeria—OPEC said its members agreed that they need to cut crude output to reduce the world’s supply glut, a shift for the 14-member group that was enough to send oil prices higher,.
Members of the Organization of the Petroleum Exporting Countries said they reached an understanding after a six-hour gathering in the Algerian capital, but deferred until November the fraught task of finalizing a plan to make those cuts. OPEC officials said a committee would be formed to determine how much each country would have to cut and then report to the group at its next meeting on Nov. 30 in Vienna.
Determining which countries will cut and by how much is a delicate negotiation that has undone previous efforts to curb output and boost prices.
Still, the group’s position after a session of informal talks that turned into an emergency meeting represents the first collective acknowledgment since oil prices cratered two years ago that the group will need to take action to alleviate a situation that has wreaked havoc on their economies.
The prospect of production cuts, which OPEC traditionally has used to prop up oil prices, sent crude oil benchmarks up more than 5% on Wednesday and gave some support to U.S. stocks. The Dow Jones Industrial Average climbed 111 points.
The group proposed cutting its collective output to between 32.5 million barrels a day and 33 million barrels a day, down from August levels of 33.2 million barrels a day, national oil ministers said.
If OPEC cuts its production by 200,000, to 33 million barrels a day, that wouldn’t be enough to bring production back in line with demand until the second half of 2017, according to estimates by the International Energy Agency. That timing is roughly in line with what analysts already believed would happen if OPEC took no action.
If OPEC cut output by up to 700,000 barrels a day, the production glut would disappear as soon as the end of this year, according to IEA estimates. The world’s inventories could then be drawn down and prices could rise.
“Today, an exceptional decision was made at OPEC,” said Iran’s oil minister, Bijan Zanganeh, according to state media.
Iran’s commitment to boosting its production has been a major stumbling block in reaching a deal to date, especially because its bitter and powerful rival, Saudi Arabia, has refused to sign on to any production curbs unless Iran did, too.
One factor that could make it easier for members to hash out a deal: The group is already pumping full tilt at levels that are hard to maintain.
OPEC has been producing at record levels as its members compete among themselves for buyers. Saudi Arabia, the group’s largest producer, has also been pumping at record levels in recent months and was expected to slow down output in the fall and winter anyway.
“In a way it’s like they’re agreeing to nothing,” said Jay Hatfield, a portfolio manager at Infracap MLP Fund in New York, likening the small cuts proposed to taking their collective foot off the gas pedal instead of stepping on the brake.
The group hasn’t approved a production cut since 2008, after the financial crisis decimated oil demand and sent prices below $40 a barrel.
Until now, Saudi Arabia, the group’s de facto leader, reasoned that an American oil boom made OPEC’s traditional move of cutting production levels less effective at propping up the market.
Instead, Saudi Arabia and other OPEC members opened the spigots full blast and pumped record levels in a competition for market share, reasoning that low oil prices would push some producers out of the market and prices would eventually rise as demand overtakes falling supply.
But U.S. production has been more resilient than most observers expected, and billions of barrels of the world’s vast oversupply of oil has been put into storage, delaying the day when demand catches up to supply.
Oil prices fell below $30 a barrel this year for the first time in over a decade and have remained stuck between $40 and $50 for months. That has resulted in cheap energy costs for consumers but also tens of thousands of layoffs in the petroleum business, which has dragged on the U.S. economy at times.
The group kicked off Wednesday’s meeting with acknowledgments that it needs to rebuild credibility in the oil market after two years of vague promises of action that came to nothing.
At OPEC’s last meeting, in June, when the group took no action, OPEC believed supply and demand would harmonize, and prices would recover, late this year or early next.
“Our expectations about the rebalancing process have shifted,” said OPEC Conference President Dr. Mohammed Bin Saleh Al-Sada, in a speech to the group before its private gathering. “It is evident that there is now a greater degree of urgency.”
Saudi Energy Minister Khalid al-Falih said this week that the market needed reassurance, “a gentle adjustment.” It wasn’t a call for significant action, but it represented a departure from Mr. Falih’s predecessor, longtime Oil Minister Ali al-Naimi, who had declared OPEC was no longer a cartel and that the days of production cuts were over.
On Wednesday, after weeks of shuttling from Algiers to Moscow to Paris to persuade oil ministers it was time to cut production, Algeria’s oil minister, Noureddine Bouterfa, said: “OPEC went back to its historic role of controlling markets.”
The meeting lacked the world’s largest producer of crude oil, Russia, which is pumping record levels of oil. Russia isn’t a member of OPEC but had been heavily involved in talks with the group about jointly slowing down output. A person familiar with the matter said the output cuts would be discussed with non-OPEC members soon.
Iran, Libya and Nigeria are all still trying to increase production by as much as 1.5 million barrels a day collectively, while countries like Venezuela and Algeria can ill afford to lose oil revenue by cutting. OPEC officials said Iran, Libya and Nigeria would be treated differently without specifying how.
OPEC’s previous efforts at regulating production were haphazard, and members often traded accusations of cheating.
“The devil lies in the detail,” said Giovanni Staunovo, analyst at UBS Group AG. “If decided in November, implementation would only happen in 2017.”
The irony for OPEC producers is that an oil-price rally caused by production cuts would benefit U.S. shale producers, who have cut back during the past two years but have been steadily adding drilling rigs. Even without OPEC action, U.S. production was forecast to increase in 2017, competing further with OPEC producers for customers.
