Saudi Arabia signalled it’s ready to cut oil production more than expected, a surprise announcement made minutes after Russia and several non-other Opec countries pledged to curb oil production next year.
Taken together, the Organisation of Petroleum Exporting Countries’s first deal with its rivals since 2001 and the Saudi comments represent a forceful effort by producers to wrest back control of the global oil market, depressed by persistent oversupply and record inventories.
“This is shock and awe by Saudi Arabia,” said Amrita Sen, chief oil analyst at Energy Aspects in London. “It shows the commitment of Riyadh to rebalance the market and should end concerns about Opec delivering the deal.”
Oil prices have surged more than 15 per cent since Opec announced November 30 it will cut production for the first time in eight years, rising this week briefly above $55, more than double their January low. The price rise has propelled the share prices of energy groups from major companies such as Exxon Mobil Corp. to shale firms such as Continental Resources Inc.
Riyadh agreed with Opec on November 30 to cut its production to 10.06 million barrels a day, down from a record high of nearly 10.7 million barrels a day in July. The country, the world’s largest oil exporter, has been pumping above the 10 million mark since March 2015.
“I can tell you with absolute certainty that effective January 1 we’re going to cut and cut substantially to be below the level that we have committed to on November 30,” Saudi oil minister Khalid Al Falih said after Saturday’s meeting.
Al Falih made his announcement after 11 non-Opec countries agreed to reduce production by 558,000 barrels a day, suggesting that Saudi Arabia had been waiting for the first global petroleum deal in 15 years before committing to further cuts. The non-Opec reduction is equal to the anticipated demand growth next year in China and India, according to data from the International Energy Agency.
The Opec and non-Opec deal encompasses countries that pump 60 per cent of the world’s oil, but excludes major producers such as the US, China, Canada, Norway and Brazil.
Saudi Arabia, Opec’s de facto leader, has long insisted that any reductions from the group should be accompanied by action from other suppliers. Opec two weeks ago agreed to reduce its own production by 1.2 million barrels a day.
Russia had already announced it plans to cut output by 300,000 barrels a day next year, down from a 30-year high last month of 11.2 million barrels a day. At the meeting in Vienna on Saturday, Mexico pledged to cut 100,000 barrels, Azerbaijan by 35,000 barrels and Oman by 40,000 barrels, a delegate said.
Oil officials said Mexico’s contributions would be made through “managed natural decline,” meaning the Latin American nation will not cut output deliberately, but will let production fall as its ageing fields yield less. Other countries such as Azerbaijan are likely to follow the same route for their cuts.
In a surprise move, Kazakhstan pledged a 20,000 barrels a day cut after coming under strong diplomatic pressure, the minister. The Kazakh cut is particularly important because the International Energy Agency had expected the Asian nation to boost production in 2017 by 160,000 barrels a day after a giant oilfield started pumping.
For analysis on how the deal may impact oil markets, click here.
Opec production reached an all-time high of nearly 34.2 million barrels a day, well above the group’s target of 32.5 million barrels a day from January. Libya and Nigeria are exempted from the Opec output cuts, while Iran has some room to boost its output.
Riyadh this week informed customers in Europe and North America that it would supply less oil in January than December, reassuring Russia and others in the non-Opec camp that the oil club is making good on its cuts. The United Arab Emirates said on Saturday that it will take similar action, and Kuwait followed suit.
The focus of the market will turn now to compliance as historically Opec and non-Opec countries have cut far less than promised. In late 2001 for example Moscow promised to reduce output, but actually it increased it the following year. Russia and Oman will join Opec members Algeria, Kuwait and Venezuela on the committee to oversee implementation on the accord.
“The oil price crash impelled terrified producers into collective supply restraint agreements,” said Bob McNally, founder of consultant Rapidan Group in Washington and a former White House oil official. “Occasionally these loose, ad hoc producer agreements enjoyed temporary success, but all eventually failed due to cheating from without and within.”