Saudi Arabia Pulls Off Deal To Cut OPEC Oil Production

News of the deal drove the key global benchmark Brent crude up by 9 per cent to $US50.41 a barrel with U.S. prices rising a similar amount.

Mohammed Bin Saleh Al-Sada, Opec’s president, said a cut of 1.2 million barrels a day would start from January.

The deal is also contingent on an additional 600,000 barrels by other non-OPEC countries, like the United States or Russian Federation who surprised many by taking on half of that burden by willing to cut 300,000 barrels.

He added that because Indonesia is a net importer of oil, the country has suspended its membership in OPEC rather than participate in the production cuts. OPEC agreed to cut approximately 4.5%, or 1.2 million barrels per day (mb/d), from their collective output starting in January 2017. Between them they account for around 24 percent of OPEC’s output, with Iraq producing 13.5 percent of OPEC’s oil and Iran accounting for 11.8 percent.

If you were long oil early Wednesday, then you’ve received your Christmas gift already, but whether prices will continue to surge higher depends on multiple factors.

Key OPEC member Saudi Arabia said it was prepared to accept “a big hit” on its own production and agree to arch-rival Iran freezing output at pre-sanctions levels.

Barclays has expressed skepticism, as the agreement only caps production, not exports. The original five founding member countries were the Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

Benchmark Brent crude for February rose $1.10 a barrel to a high of $52.94 and traded around $52.90, up $1.06 by 1315 GMT.

That’s great for gas consumers, but not as great for the 14 OPEC member states, which rely on strong, steady oil prices to bolster their economies.

The agreement was reached at a meeting of OPEC ministers in Vienna that was overshadowed by regional geopolitics, with Saudi Arabia and Iran jostling for economic and regional advantages. This will bring the cartel’s overall daily output down to 32.5 million barrels a day.

U.S. refined products also rose along with crude – ultra low sulfur diesel (ULSD) futures soared as much as 5.5% to its highest in more than a year while gasoline futures jumped about 6%. That decision led OPEC to record-high production, adding more supply to an already flooded market and eventually dropping prices below $30 a barrel, so low that many anxious it could fuel a global recession.

In short, analysts say, consumers and businesses are not likely to see the return of $100-a-barrel oil – and the high energy costs that came with it – anytime soon.