VIENNA (Reuters) – OPEC and its Russia-led allies agreed on Friday to slash oil production by more than the market had expected despite pressure from U.S. President Donald Trump to reduce the price of crude.
The producer club will curb output from January by 0.8 million barrels per day versus October levels while non-OPEC allies contribute an additional 0.4 million bpd of cuts, in a move to be reviewed at a meeting in April.
Oil prices jumped about 5 percent to more than $63 a barrel as the combined cut of 1.2 million bpd was larger than the minimum 1 million bpd that the market had expected.
Saudi Arabia, de facto leader of the Organization of the Petroleum Exporting Countries, has faced demands from Trump to help the global economy by refraining from paring supplies.
An output curtailment also would provide support to Iran by increasing the price of oil amid attempts by Washington to squeeze the economy of OPEC’s third-largest producer.
Asked whether the decision to cut could sour Riyadh’s relations with Washington, Saudi Energy Minister Khalid al-Falih told reporters the kingdom was ready to pump more should a major supply outage occur.
“We will not squeeze consumers beyond what they can afford,” he said, adding that given the United States had recently become the biggest oil-producing nation, its energy companies were “breathing a sigh of relief”.
Further complicating Riyadh’s decisions this week was the crisis around the killing of journalist Jamal Khashoggi at the Saudi consulate in Istanbul in October. Trump has backed Saudi Crown Prince Mohammed bin Salman despite calls from many U.S. politicians to impose stiff sanctions on the kingdom.
Falih refrained from answering a question on whether the OPEC decision might prompt Washington to withdraw support, but said Saudi-U.S. relations were based on shared values.
The OPEC deal had hung in the balance for two days – first on fears that Russia would cut too little, and later on concerns that Iran, whose crude exports have been depleted by U.S. sanctions, would receive no exemption and block the agreement.
But after hours of talks, Iran gave OPEC the green light and Russia said it was ready to cut more.
Russia gave a commitment to reduce output by 228,000 bpd from October levels of 11.4 million bpd, though it said the cuts would be gradual and take place over several months.
The country’s energy minister, Alexander Novak, said Russian President Vladimir Putin had discussed an output decrease with Saudi Prince Mohammed.
Iraq, OPEC’s second-largest producer, pledged to cut 140,000 bpd. Falih said Saudi production had dropped to 10.7 million bpd in December from 11.1 million in November and was set to decline to 10.2 million bpd in January.
Iran, Libya and Venezuela were effectively given exemptions. Nigeria, which has been exempt since the previous round of cuts from January 2017, agreed to participate.
Helima Croft, managing director at RBC Capital Markets, said the deal exceeded expectations.
“Having the next meeting in April will be important for planning purposes to speed the cycle up a bit,” she said. OPEC normally meets once every six months.
“We don’t know what will Iran’s sanctions picture look like. We don’t know the Iranian volumes which will be coming off the market,” Croft said.
But Bob McNally, president of U.S.-based Rapidan Energy Group, said the details of the cut were “fuzzy” and would likely result in a lesser reduction than the headline figure.
“President Trump will not be happy to see today’s headlines, but how strongly he reacts depends mainly on whether crude prices rise strongly as a result in coming days and weeks.”
U.S. special representative for Iran Brian Hook met Falih in Vienna this week, in an unprecedented development ahead of an OPEC meeting.
Saudi Arabia first denied the Hook-Falih discussion took place but later confirmed it.
“U.S. political pressure is clearly a dominant factor at this OPEC meeting, limiting the scope of Saudi actions to rebalance the market,” said Gary Ross, chief executive of Black Gold Investors and a veteran OPEC watcher.
The price of crude has fallen almost a third since October as Saudi Arabia, Russia and the United Arab Emirates raised output to offset lower exports from Iran. [O/R]
Russia, Saudi Arabia and the United States have been vying for the position of top crude producer in recent years. The United States is not part of any output-limiting initiative due to its anti-trust legislation and fragmented oil industry.
On Thursday, U.S. government figures showed the country had become a net exporter of crude oil and refined products for the first time on record, underscoring how the surge in production has altered the supply equation in world markets.
Additional reporting by Ahmad Ghaddar and Alex Lawler; Writing by Dmitry Zhdannikov; Editing by Dale Hudson; Graphics by Amanda Cooper