Defying U.S., OPEC Makes Deal to Cut Oil Output

Posted December 7, 2018 6:50 p.m. EST
Updated December 7, 2018 6:54 p.m. EST

VIENNA — Moving to prop up prices, OPEC and its oil-producing allies agreed on Friday to cut production by 1.2 million barrels a day despite pressure from President Donald Trump to maintain current output levels and keep prices low.

Saudi Arabia, OPEC’s de facto leader, will make the biggest cut. Russia, which is not an OPEC member but is an increasingly important factor in global oil markets, will account for much of the rest.

The agreement on cuts, which were deeper than expected, capped two days of meetings focused on a growing oil glut that had caused prices to drop by roughly a third since early October.

“This meeting is an important test not only for OPEC’s ability to function effectively, but especially of the new cooperation between Saudi Arabia and Russia,” said Jason Bordoff, director of Columbia University’s Center on Global Energy Policy, who was in Vienna to monitor the sessions.

Oil prices rose sharply after the news emerged, then eased. Brent crude, the international bench mark, and West Texas intermediate crude, the U.S. standard, both ended the day up about 2 percent.

Analysts said the output cuts seemed likely to achieve their purpose. “This is a very important step to stabilize the markets,” said Roger Diwan, a vice president for strategy at the research firm IHS Markit. “This is a big cut.”

Members of the Organization of the Petroleum Exporting Countries are supposed to make cuts totaling 800,000 barrels a day from an October baseline, with Russia and other nonmembers cutting 400,000 barrels a day.

The Saudis are clearly planning to absorb the bulk of the reductions. Khaled al-Falih, Saudi Arabia’s energy minister, estimated that Saudi production would decline to about 10.2 million barrels a day in January, a cut of about 500,000 barrels from its October level.

While the Saudis wanted other producers to help, they seemed determined to act quickly, Diwan said. “This is hands on the wheel,” he added.

The Russian energy minister, Alexander Novak, said his country’s output, 11.4 million barrels a day in October, would be reduced by around 230,000 barrels.

Chris Midgley, global director of analytics for S&P Global Platts, which tracks energy and commodities markets, said the deal reflected “sensible diplomacy” by the Saudis in the face of U.S. pressure. “They look to Russia to get involved,” he said. “It takes some of the focus off them.”

Over the summer and fall, the Saudis and Russia ramped up production quickly in response to pressure from Trump and to ease market anxiety over the potential drying up of supplies because of Washington’s reimposition of sanctions on Iran. In November, Saudi output reached an unusually high level of 11.1 million barrels a day.

Al-Falih said the producers group could “swing both ways.” With growing concerns about oversupply, he said, it was natural to take crude off the market to avoid “a glut that brings havoc” to the oil industry.

In the past, the Saudis have tried to avoid being the swing producer, the oil power that adds and subtracts supplies according to market pressures. At the moment, though, they seem more or less stuck with that role.

In two days of difficult negotiations, the Saudis pushed for all OPEC members to join in the cuts. In the end, though, the group granted exemptions to Iran, whose output is declining because of Washington’s sanctions, and Venezuela and Libya, whose production has been hampered by political and economic turmoil and civil strife.

So aside from Saudi Arabia, only a few OPEC countries — chiefly Kuwait and the United Arab Emirates — are likely to contribute much to cuts, analysts said.

Despite Friday’s market reaction, some analysts said Saudi Arabia and Russia — two of the world’s three biggest oil producers, along with the United States — might just be pushing off a reckoning for a few months. They noted that supplies from the United States, mainly from shale producers, had been increasing faster than most analysts expected a few months ago.

“The OPEC-plus cuts announced today fall short of the amount needed to prevent large stock builds early next year given the supply tsunami underway,” said Robert McNally, president of Rapidan Energy Group, a market research firm.

McNally was also skeptical that there would be full compliance with the agreement, noting that with the exception of Saudi Arabia and Russia, it was not clear how the cuts would be allocated. The oil market remains volatile, and global supplies could tighten if crises occur simultaneously in unstable producing countries like Libya, Nigeria and Iraq, or if hostilities break out between Saudi Arabia and Iran.

Still, the Saudis managed to patch together a deal, mainly because of Russia’s willingness to join in at least limited cuts. While Russian oil companies may chafe at having to pare output, President Vladimir Putin seems to value collaboration with OPEC.

“The Russians like to be involved in the management of the market just as much as Trump does,” said Joseph McMonigle, an analyst for Hedgeye, a market research firm.