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OPEC, in Rebuke to Trump, Agrees to Cut More Oil Output to Prop Up Prices

The Organization of the Petroleum Exporting Countries, aka OPEC, and its Russian-led allies on Friday agreed to further reduce global oil output in an attempt to balance an overflowing market and stem falling prices.

The Saudi-led cartel said production levels would be reduced by 1.2 million b/d beginning in January, despite pressure from President Trump to maintain current levels to benefit U.S. consumers at the fuel pump.

On the news, the price of oil climbed sharply. Around midday Friday, West Texas Intermediate was up about 4.5% to trade at around $53.79/bbl, while Brent was up more than 5% to about $63.16.

Most of the reductions are to be by Saudi Arabia, which agreed to cut output by about 900,000 b/d from November levels. Russia, which is not an OPEC member but works with the members, would account for most of the remaining larger-than-expected reduction.

The agreement by the 5th OPEC and non-OPEC Ministerial Meeting was reached in Vienna during marathon meetings about how to manage a surfeit in global oil production, which has escalated since the U.S. onshore boom.

Prices have fallen sharply since peaking in October, however, threatening to stifle future U.S. onshore production. The meeting was co-chaired by OPEC President Suhail Mohamed Al Mazrouei, minister of energy and industry of the United Arab Emirates, and the Russian Federation’s Alexander Novak, minister of energy.

The cartel initially reached a “declaration of cooperation” in December 2016 to reduce global output. Prompted in part by Trump, who criticized the cartel in April and said high oil prices “will not be accepted,” OPEC in June secured a compromise, albeit modest, to effectively add about 600,000 b/d back into the market, which has modestly pressured prices at the pump. Since the start of 2017, OPEC and its allies have worked to reduce global oil supply by at least 1.2 million b/d.

Members and their allies at the latest meeting reaffirmed the “continued commitment of the participating producing countries...to a stable market, the mutual interest of producing nations, the efficient, economic, and secure supply to consumers, and a fair return on invested capital…”

The cartel also noted “the overall improvement in market conditions and sentiment, and the return of confidence and investment to the oil industry.”

However, because OPEC foresees a “growing imbalance between global oil supply and demand in 2019,” the members and allies agreed to adjust overall production beginning in January “for an initial period of six months.”

Contributions from OPEC would correspond to an additional reduction of 0.8 million b/d (2.5%) while Russian-led allies would reduce oil output by another 0.4 million b/d (2.0%). The next ministerial meeting is scheduled for April.

“Producers will use October 2018 as the baseline production level, which implies to us that a significant portion of the OPEC cut has already occurred via lower Iranian production,” ClearView Energy Partners LLC analysts said.

“If the OPEC and non-OPEC production cuts come to fruition, plus lower Canadian oil output stemming from the recently announced curtailments, then we estimate the global oil market could swing from a surplus in the first half of 2019 to a deficit in the second half of 2019.”
However, the ClearView team said the lower oil supply forecasts and expected higher oil prices “could raise the ire” of President Trump “and potentially catalyze Congressional legislation that would enable the Justice Department to sue OPEC producers for antitrust violations.”

Moody’s Investors Service’s Steve Wood, managing director of corporate finance, said the announced production cuts by OPEC and Russia “will contribute to more balanced global supply and demand, and help to stabilize oil prices. The more than 30% drop in oil prices over the past couple months demonstrates the importance of oil companies maintaining capital discipline and reducing debt in the face of ongoing price volatility."

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