Oil price surges as Opec agrees first production cut since 2008

Opec said it would reduce output by 1.2m barrels per day (bpd) to 32.5m bpd from January for at least six months, under a deal linked to co-ordinated cuts of 600,000 bpd by key non-Opec producers including Russia, reports The Telegraph.

Mohammed bin Saleh al-Sada, Opec president, said the “historic” agreement thrashed out by oil ministers in Vienna had been made “for the general wellbeing and the health of the world economy”.

The collapse in oil prices since June 2014 has battered the economies of oil-producing nations and seen investment in new projects slashed, stoking fears that the world could be headed for a new supply shortage within a few years.

Mr al-Sada said the agreement would “definitely help rebalancing the market”, enabling the industry to “come back and reinvest” in new production capacity to ensure future security of supply.

The deal sent Brent crude soaring and helped the Dow and S&P 500 to intraday record highs as energy stocks led the gains.

Opec’s 14 members together produce about one-third of the world’s oil but sceptics have questioned the once-dominant cartel’s continued relevance in the face of the US shale revolution.

Many doubted whether it would be able to overcome internal disputes to make good on an initial September pledge to curb production, with Saudi Arabia, Iran and Iraq at loggerheads over their respective share of the cuts.

In a key concession, Saudi – the cartel’s biggest producer – accepted what its energy minister described as a “big hit” to its output, of almost 486,000bpd, while at the same time allowing Iran to slightly increase its production as it recovers from the impact of sanctions.

Indonesia, a net importer of oil, was unable to agree to cut and requested temporary suspension from Opec. Mr Al-Sada said the new 32.5m bpd ceiling applied to the 14 countries’ output and factored in Indonesia’s production at current levels.

But experts warned that the devil would be in the detail of the Opec agreement and whether it is actually implemented. Even if it is, US shale may be the first beneficiary of rising prices rather than the cartel’s members or conventional oil projects.

It was unclear tonight whether the Opec cuts were wholly contingent on the planned 600,000bpd cuts by non-Opec members, including a 300,000bpd cut by Russia.

Mr Al-Sada initially appeared to say the Opec curbs were subject to non-Opec action, but later declined to clarify whether the non-Opec cuts were binding, saying they were “achievable”.

Russian energy minister Alexander Novak said the country was ready to cut its output “gradually” by to 300,000bpd over the first half of 2017, but did not say from what level.

“Throughout 2016, the oil market has risen on speculation – and pronouncements – about Opec producers agreeing to production curtailments,” said Terry Marshall, of ratings agency Moody’s. “Even with today’s announcement, we remain skeptical that a global balancing of production and demand is likely through at least the first half of 2017, as Opec agreements are difficult to implement and difficult to enforce.”

Spencer Welch, director of IHS Energy, said: “Today’s deal will certainly provide some short term market price boost. But disagreements persist among OPEC members on how to measure production, so the deal will be hard to police.”

But Bob Minter, investment strategist at Aberdeen Asset Management, said the agreement “appears to have teeth”, pointing to the creation of a new Opec committee to monitor production.

“People were seriously starting to question Opec’s ability to react to what has been going on in the oil market and this reaffirms their ability to act as a group,” he said.

Neil Wilson, of ETX Capital, said despite the doubts over the detail of the agreement “on the whole Opec should be pleased with a job well done at long last”. “This is likely to keep crude closer to $50 than $40 for now,” he said.