Energy

OPEC and its allies agree to deepen oil production cuts by a further 500,000 barrels per day

Key Points
  • The new deal, which is much larger than many analysts had expected, will see OPEC+ reduce total oil output by 1.7 million b/d.
  • Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman explained his country would also extend a voluntary cut of 400,000 b/d.
  • This means the energy alliance's total cuts would effectively amount to 2.1 million b/d, he said.
  • The energy alliance has said it plans to review the policy at a meeting on March 5-6.
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OPEC agrees to cut production by an additional 500,000 barrels per day

Energy ministers from some of the world's largest oil producers have agreed to deepen recurring production cuts by an additional 500,000 barrels per day (b/d) through to March 2020.

OPEC and non-OPEC allies, often referred to as OPEC+, decided to implement tighter oil production policy at a biannual meeting in Vienna, Austria on Friday.

The new deal, which is much larger than many analysts had expected, will see OPEC+ reduce total oil output by 1.7 million b/d.

The energy alliance has said it plans to review the policy at an extraordinary meeting on March 5-6.

Oil prices rallied shortly after the OPEC+ announcement. International benchmark Brent crude traded at $64.70 on Friday afternoon, up around 2%, while U.S. West Texas Intermediate (WTI) stood at $59.63, over 2% higher.

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Saudi energy minister: 'Deep' discussion led to OPEC+ output deal

However, Brent crude futures remain around 15% lower when compared to an April peak, with WTI down almost 12% over the same period.

Compliance quotas

Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman told reporters on Friday that the oil-rich kingdom's quota would be an additional 167,000 b/d through to March 2020.

Sitting alongside OPEC delegates at a press conference shortly after the meeting, Abdulaziz explained his country would also extend a voluntary cut of 400,000 b/d. This means the energy alliance's total cuts would effectively amount to 2.1 million b/d, he said, before emphasizing that OPEC+ would only be able to achieve this figure with improved compliance.

OPEC's de facto leader, Saudi Arabia has been adamant those that have previously been overproducing — such as Iraq and Nigeria — must comply with the group's quota.

Russian Energy Minister Alexander Novak said Moscow's quota would be 300,000 b/d during the first three months of 2020. This measurement excludes gas condensate — a high-value light crude extracted as a by-product of gas production.

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What is OPEC?

What's the context?

The energy alliance was prompted to act after global oil prices tumbled in mid-2014 due to an oversupply, but U.S. shale producers are not a part of the deal and shale oil supply has grown exponentially.

The U.S. is now the world's largest oil producer hitting 12.3 million b/d in 2019, according to the U.S. Energy Information Administration, up from 11 million b/d in 2018. It produces more oil than Saudi Arabia and Russia now, although there are signs that production growth is slowing in the States.

Along with rampant shale supply, faltering demand due to a global economic slowdown, exacerbated by the Sino-U.S. trade war, has once again threatened to unbalance oil supply and demand dynamics.

— CNBC's Holly Ellyatt, Emma Graham and Hadley Gamble contributed to this report.