London — OPEC, Russia and nine other allies delivered a new production cut deal Friday, just hours after it appeared their pact was close to unravelling.
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Oil prices rallied on the announcement the OPEC+ group will deepen collective output cuts by 503,000 b/d to 1.7 million b/d from January through March. At 1707 GMT, NYMEX front-month crude was trading 63 cents higher at $59.57/b, while ICE front-month Brent was trading around $64.20/b, up 81 cents.
"We have analyzed in depth scenarios and options and have come to a conclusion that to balance the market, 500,000 b/d of additional cuts would be needed," Russian energy minister Alexander Novak said.
OPEC's kingpin Saudi Arabia took it even further, declaring it would voluntarily slash another 400,000 b/d of production beyond its new quota, bringing the group's total supply curbs to 2.1 million b/d. The coalition will meet again March 5-6 in Vienna to assess the impact of the new deal and decide whether to renew them beyond their end-March expiry.
"We already believed market fundamentals warrant $66/b Brent in January, even assuming the existing agreement simply rolled over through end-2020," said S&P Global Platts Analytics following the decision. "Needless to say, a lower supply forecast provides more support."
However, the market still looks challenging for OPEC in the months ahead. The coalition's inability to agree on extending the deeper cuts beyond March sets the stage for another potentially tough meeting three months from now.
The deal calls for the OPEC to shoulder 372,000 b/d in new cuts, with the non-OPEC partners taking on 131,000 b/d.
Saudi Arabia's new quota is 10.145 million b/d, but the kingdom plans to produce at a maximum of 9.744 million b/d, energy minister Prince Abdulaziz bin Salman said.
Russia agreed to expand its 228,000 b/d in cuts by an additional 70,000 b/d for a total of about 300,000 b/d. Its quota will be 10.328 million b/d, based on figures Novak provided, with its condensate production is now exempted from its cap - a significant concession granted to all of the non-OPEC participants.
Bob McNally, president of Rapidan Energy Group, said the "Saudi surprise" of additional cuts showed the kingdom was "very concerned about H1 inventory builds and ... that they must continue to be the 'adult in the room' and manage the market."
Saudi Arabia was seen to be motivated by its initial public offering (IPO) of shares in state oil giant Saudi Aramco, with the pricing announced Thursday and shares set to begin trading December 11.
Indeed, Prince Abdulaziz told reporters at a press briefing that he was confident the oversubscribed IPO would cause Aramco's valuation to soar beyond its initial $1.7 trillion to surpass the $2 trillion that kingdom officials had aimed for.
"I can bet that it will happen," he said.
Getting to this point was not easy for Saudi. Many OPEC watchers expected the coalition to agree at most to extending cuts at the same levels, seeing scant appetite among members for ceding additional market share.
But bearish forecasts for the coming months appeared to sufficiently motivate the group to explore deeper curbs.
Even when the framework of a deal for a 500,000 b/d cut emerged Thursday afternoon, analysts questioned whether it would actually involve actual new cuts or simply codify Saudi Arabia's overcompliance with its quota, keeping overall supply balances unchanged.
Negotiations over how to distribute the cuts almost tore the group apart. Angola at one point walked out of talks on Thursday, and Iraq played hardball on its quota. On Friday, even Russia was reportedly resisting efforts to rein in its production.
Prince Abdulaziz's hardline approach, threatening to flood the market and tank oil prices if members did not commit to tighter compliance did not go over well, sources involved in the negotiations said.
But the group's communal desire to avoid a price slide overcame all their differences, and ministers emerged from Friday's meeting saying they were united in their cause. Even so, there was initial market confusion as the coalition did not release any actual details on how the cuts had been apportioned until about a half hour after the post-meeting press briefing.
The prince said the deal -- with Saudi Arabia's voluntary additional cuts -- would involve actual physical barrels being left in the ground, and not just some "fiddling with numbers" on paper, as some analysts feared.
"In all our deliberations, we will all try to figure out not only what to do, but what to do in a convincing way that assures the market and not only assures the objective analysts, but also the cynical analysts that we're doing our job properly," Prince Abdulaziz said.
COMMITTED TO THE CAUSE
However, the deal's credibility will only be validated by actual compliance to the new quotas.
OPEC members Iraq and Nigeria have been serial violators of their quotas, and Russia has also had patchy compliance, though its condensate exemption should help it improve its performance.
Ministers from Iraq and Nigeria pledged at a press briefing they were making real progress towards compliance. Nigeria's minister Timipre Sylva cited an improved security environment and his Iraqi counterpart Thamir al-Ghadhban said a production sharing deal with the Kurdistan Regional Government would help.
"While the cut looks good for the market on paper, the devil is in the details -- specifically how many additional barrels will actually come off the market," said Ellen Wald, president of Transversal Consulting. "Both Nigeria and Iraq promised to bring their production into full compliance, but such promises have been made and broken before."
However, Prince Abdulaziz said he would no longer tolerate excuses.
"Our voluntary contributions will continue only when we see everybody has committed to what they were supposed to do," he warned.
--Herman Wang, Aresu Eqbali, Rosemary Griffin, Eklavya Gupte, Dania Saadi; firstname.lastname@example.org
--Edited by Andy Critchlow, email@example.com