Oil-producing countries strike deal with OPEC to cut output

Oil-producing nations struck a deal Saturday to cut output along with the Organization of the Petroleum Exporting Countries, a pact designed to reduce a global oversupply of crude, lift prices and lend support to economies hurt by a two-year market slump.

The agreement would remove 558,000 barrels a day of crude oil from the market. That would come on top of 1.2 million barrels a day in cuts already agreed to by OPEC, amounting to a total of almost 2% of global oil supply, Reuters reports.

The non-OPEC cuts, if carried out as described over the first half of 2017, would represent an unprecedented level of cooperation among oil-producing countries that have been groping for ways to lift oil prices out of a two-year funk.

“This is truly a historic event,” Russian Energy Minister Alexander Novak said. ”It is the first time that so many oil-producing countries from different parts of the world have gathered in one room to accomplish what we have done.”

The bulk of the cuts - 300,000 barrels a day—have been pledged by Russia, which produces more crude oil than any other country. Other output reductions are promised by 10 other countries, including Oman, Azerbaijan and Sudan.

Big questions remain going forward. OPEC members themselves have a spotty record of enforcing their own agreements, and there is no legally binding way to deter producers inside or outside the cartel from cheating on their pledges.

For now, it also remains unknown how much of the cuts promised Saturday would have happened anyway through natural decline rates that were expected. Neither OPEC nor its non-OPEC allies provided a detailed list of production cuts.

Saudi Energy Minister Khalid al-Falih said countries could count such natural declines toward the production cut. “This agreement leaves for countries to decide how to implement,” he said.

Oil-market analysts said prices wouldn’t go up if many of the cuts were from countries where production is
expected to fall anyway.

Nevertheless, the deal represents a diplomatic breakthrough for OPEC as it grapples with a world where other oil producers have as much or more power over the market as the 13-nation cartel.

It is the first time OPEC has convinced non-OPEC producers to join in output cuts since 2001, when the Sept. 11 attacks sparked a recession and a fall in oil demand. Saturday’s agreement cuts deeper and involves more countries than the 2001 deal.

It also is the first time since the 1970s that a coalition of countries whose oil production amounts to more than half of global supply has come together to influence crude prices. OPEC’s own market share hasn’t been that large since the 1970s, and previous deals with non-OPEC producers have been less comprehensive.

Oil-industry analysts have said the production cuts could speed up a long-awaited rebalancing of global oil supply with consumer demand, which have been out of whack for more than two years.

An American oil boom over the past eight years flooded the market. OPEC—especially its biggest member, Saudi Arabia—initially ratcheted up its own output to defend its market share, abandoning its traditional role of regulating supply to keep prices high.

But prices fell farther and for longer than the industry expected, falling below $28 a barrel this year from highs of more than $100 a barrel in 2014. OPEC members such as Venezuela and Nigeria have experienced economic disasters, while Saudi Arabia began burning through its cash reserves to plug a gap caused by falling oil revenue.

OPEC decided Nov. 30 to return to its old form and cut production back to boost prices, but members such as Saudi Arabia insisted Russia and other countries outside the cartel pitch in as well. Saturday’s agreement formalizes commitments non-OPEC producers made to OPEC.