OPEC output agreement at Algiers: Brent crude rises 6%

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Yesterday’s OPEC meeting at Algiers reached an agreement many thought impossible: the cartel has agreed to cut monthly production by 240,000-740,000 b/d from August levels. The new output target is 32.5-33m bpd.

Russia and Saudi Arabia, two of the most powerful players at the OPEC meeting, reached a memorandum of understanding earlier this month at the G20 in China, indicating that they would work together to monitor the global oil market. While this raised hopes of a potential freeze agreement at the Algiers meeting, few were expecting a production cut. OPEC Secretary-General Mohammed Barkindo further dampened expectations by saying that the Algiers meeting would be informal, used for discussions, “not making decisions.

Instead, on Wednesday the leaders of OPEC decided to formalise the Algiers meeting, and made the decision to intervene with a production cut – something we haven’t seen since 2008 in the middle of the GFC. The oil market has responded with an overnight 6% rise in Brent crude, up to $48.85, with big oil producer stocks following suit around the world.

While it isn’t clear how exactly OPEC’s cuts will happen and who will be responsible for them, Saudi Arabia brought a more judicious approach to the table than it has in the past. Though Saudi officials maintain a production freeze in Iran as a deal-breaker, they have indicated that countries with a history of output issues like Libya, Nigeria and Iran, would not be as strictly bound to production cuts.

The coming weeks will tell how viable the agreement is, as discussions continue with member states around specific numbers and how OPEC plans to implement and enforce the agreement. For a lasting lift in oil prices, the cut would need to be at the highest end of the nominated range, an ambitious target which would see Saudi Arabia taking the majority of reductions – a position which might test the nation’s newfound even-handedness.

 

Rigforce communications are intended to provide general information and commentary and should not be taken as professional or legal advice.

Posted by Alastair Haldane