Russia agrees to join "excessive" Opec output cuts

By bne IntelliNews November 30, 2016

The Organisation of Petroleum Exporting Countries (Opec) defied the skeptics and reached a long-sought deal on cutting oil output on November 30 after intense ministerial talks in Vienna.

While unnamed sources in the energy ministry in Moscow told Reuters that Opec's proposal that non-cartel member Russia cut output by 0.4mn barrels daily was “excessive”, Energy Minister Alexander Novak later said the country would strive to reach the targeted output reduction.

Russia, which is currently pumping at a post-Soviet record, will cut by as much as 300,000 barrels a day “conditional on its technical abilities,” Novak said in Moscow.

Reportedly the three biggest producers in the cartel – Saudi Arabia, Iraq and Iran – have resolved the conflict over sharing the burden of the cuts. Opec will cut output by 1.2mn barrels daily to 32.5mn barrels. Brent oil rose to over $50 per barrel on the news.

Throughout 2016, Russia's daily oil output has fluctuated at post-Soviet record-highs of 10.3mn-11mn barrels daily. Opec proposed non-member states cut their consolidated output by 0.6mn barrels daily, of which Russia would cut 0.4mn barrels.

Saudi Arabia, the largest global producer of oil along with Russia, agreed to cut its output by 0.6mn barrels daily to 10.6mn barrels, thus taking on half of the total Opec output cut.

At the same time, reports said the Saudis accepted that Iran as a special case can raise its output to about 3.9mn barrels daily.

Should Russia and Opec now follow through on the oil cut agreements, the oil price could rise to over $60 per barrel, according to Goldman Sachs estimates. The base-case scenario of the bank for the first half of 2017 is $56.5 per barrel, with an upside of $6 per barrel if Opec non-member states comply with the agreement. 

However, the bank does not expect the price to rise over $55 per barrel in the medium-term, as in 2017 shale oil producers from the US are ready to influx another 0.8mn barrels daily on the global markets once prices rise.

Oil traders surveyed by Reuters also saw the 1.5mn barrels daily cut reached by Opec and Russia as insufficient to cause a prolonged increase in oil prices, also pointing to risks of renewed oversupply from the US and new oil fields being launched in Kazakhstan. "This [deal] gives an impulse, but it is not comparable to the 2008 cut," an unnamed oil trader said, referring to the 4.2mn extraction cut reached by Opec in 2008.

Nevertheless Fitch Ratings believes that the Opec agreement "should help accelerate market re-balancing and increases the chances of more rapid oil price recovery than previously expected", the agency said on December 1.

"The Opec commitment alone could end market oversupply, and should result in a gradual decrease in [Organisation for Economic Co-operation and Development] oil stocks throughout 2017," Fitch wrote.

Still, the agency sees implementation risks, and also notes US oil production dynamics as another key driver of the oil price direction in the medium term, with shale production already bouncing back from recent lows and ready to accelerate. 

The deal has not changed Fitch's view on long-term oil prices, which it believes are more driven by the marginal cost of supply. The agency's latest full-cycle costs research suggests that $65 is a reasonable estimate for the oil price.

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