Oil soars 6 pct as OPEC reaches deal to limit output in November

By Reuters   September 28, 2016 | 08:44 pm PT
Oil rallies as OPEC agrees to first output cut in 8 years.

Oil prices settled up nearly 6 percent on Wednesday after OPEC struck a deal to limit crude output at its policy meeting in November, its first agreement to cut production since 2008 and after the market crashed on oversupply.

The Organization of the Petroleum Exporting Countries reached agreement to limit its production to a range of 32.5-33.0 million barrels per day (bpd) in talks held on the sidelines of the September 26-28 International Energy Forum in Algiers, group officials told Reuters.

OPEC estimates its current output at 33.24 million bpd.

"We have decided to decrease the production around 700,000 bpd," Iranian Oil Minister Bijan Zanganeh said.

OPEC will agree to production levels for each member country at its November 30 meeting in Vienna, group officials said. After reaching its group target, it will seek support from non-member oil producers to further ease the global glut.

Brent crude settled up $2.72, or 5.9 percent, at $48.69 a barrel, hitting a more than two-week high of $48.96.

U.S. West Texas Intermediate (WTI) crude rose by $2.38, or 5.3 percent, to settle at $47.05, after a peak $47.45, its highest since September 8.

The oil rally spilled over into the stock market, with Wall Street's index of energy shares rising 4 percent for its best one-day gain since January.

"This is a historic deal. This is the first time OPEC and non-OPEC will agree together in over a decade. This should put a floor on oil and should see oil move back toward the $60s," Phil Flynn, analyst at Chicago-based brokerage Price Futures Group.

"The cartel proved that it still matters even in the age of shale!," Flynn wrote in a market commentary. "This is the end of the 'production war' - OPEC claims victory."

Other analysts saw a selloff down the road, citing OPEC's general lack of adherence to quotas.

Oil prices have more than halved from highs above $100 a barrel in mid-2014 as surging production from U.S. shale oil combined with other global oversupplies and OPEC output.

As oil traders looked to OPEC to cut output, key members such as Saudi Arabia and Iran resisted, becoming more protective of individual market share even though the rout hurt the group's oil-dependent economies. The deal in Algiers follows failed talks in Qatar in April for a production freeze.

"This was unexpected for sure," Scott Shelton, energy broker for ICAP in Durham, North Carolina, said, referring to the deal. "No one that I know of saw it coming. The market doesn't seem positioned for it. The fundamentals in the U.S. are already tighter than we expected and is due to get tighter."

Oil prices gyrated earlier in the day after U.S. government data showed a surprise drop in domestic crude stockpiles for a fourth week in a row.

Jeff Quigley, director of energy markets at Stratas Advisors in Houston, said it was "too preliminary" to get excited over the OPEC deal.

"The devil's in the details here," Quigley said. "And for them to say it's going to start in November is very suspect to me. We don't know yet who's going to produce what. I want to hear from the mouth of the Iranian oil minister that he's not going to go back to pre-sanction levels."

Before the news of Wednesday's deal, Iranian's Zanganeh said the Islamic Republic would agree to curb production "at close to 4 million barrels per day". Iran's output has stagnated at 3.6 million bpd since the lifting of Western sanctions.

Michael Cohen, head of energy commodities research at Barclays in New York, was similarly pessimistic.

"Our view is that it is likely that what is going to happen is nothing more than the status quo, in which the Saudis usually reduce their output post-summertime," Cohen said. "And this is a good way to put a good face on what is likely happening already."


Photo by Reuters.

Relief arrives for U.S. shale firms

The agreement effectively establishes a floor on prices near $50 a barrel - around where many U.S. shale oil companies can make money and drill new wells. The floor is twice as high as where oil languished in the depths of the downturn.

"This gives U.S. producers more confidence," said James West, partner at the investment firm Evercore ISI in New York. "They may become a touch more aggressive than they had planned to be."

U.S. benchmark crude rose more than 5 percent to $47 a barrel on the news, pending final details about the cut, which won't be known until after another OPEC meeting in November.

One U.S. shale oil industry veteran likened the results of the prolonged price war to a bruising 12-round boxing match that ended in a technical draw.

After OPEC in mid-2014 let oil prices fall as it sought to regain market share, dozens of small and high-cost U.S. producers fell into bankruptcy.

Meanwhile, budgets of OPEC members from Venezuela to Angola shrank on a 60 percent slide in crude prices. And two days before the deal was announced, Saudi Arabia cut ministers' salaries by 20 percent and scaled back financial perks for public sector employees.

But in the United States the big shale companies - the ones responsible for the bulk of all new onshore domestic crude output - survived. They confounded OPEC by cutting costs and finding new ways to squeeze more oil from rock.

The likes of Anadarko Petroleum Corp, EOG Resources Inc, Apache Corp and more than 25 other companies showed they can weather oil at $40 a barrel and profitably drill new wells as oil ticks toward $60 a barrel.

Many U.S. shale companies, eyeing a rebound, even added acreage this year during a $12 billion land grab in the oil-rich Permian Basin of West Texas.

At least 32 companies raised a record $20.40 billion in equity markets in the first eight months of this year, with half of them doing so to buy oily land.

In July, Pioneer Natural Resources Chief Executive Scott Sheffield said overhauled shale companies were now cost competitive with Saudi Arabia.

The shale revolution, which fracks rock to coax oil from it, lifted U.S. oil production from 4.9 million bpd in 2009 to a peak of 9.6 mln bpd in June 2015.

The price plunge has since curbed output by more than 1 million bpd, to 8.5 mln bpd in September, according to data from the U.S. Energy Information Administration.

That trend could now change.

"Steadier (prices) is key," said Ann-Louise Hittle, vice president of macro oils research for Wood Mackenzie. "It would lead to an increase in the rig count ... and an increase in production."

The capitulation by OPEC took far longer than many U.S. CEOs had forecast.

In October 2014, Harold Hamm, the chief executive of North Dakota oil producer Continental Resources Inc, called OPEC a "toothless tiger." A month later he scrapped his company's hedges in a bold bet that prices would recover soon after sliding some 25 percent. Instead, they fell in half. 


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