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RFE/RL September 29, 2016
OPEC’s agreement to mend an internal rift between Saudi Arabia and Iran and curb production surprised global markets and sparked powerful rallies from Wall Street to Hong Kong.
After a two-day meeting in Algeria, the cartel on September 28 announced a deal to trim production to 32.5 million barrels a day from current output of 33.24 million, a reduction of about 740,000 barrels a day.
The deal not only sent oil prices surging by nearly 6 percent in London and New York but provoked powerful rallies in the stocks of Exxon Mobil, ConocoPhillips, and other major oil companies. The jump in energy stocks lifted broader stock markets around the globe.
Downtrodden currencies like the Russian ruble, Norwegian krone, and Canadian dollar all surged as the deal signaled the possible end of a two-year collapse in oil prices that has fed deep recessions in oil-driven economies.
Oil prices soared, with North Sea Brent crude rising $2.72 to $48.69 a barrel at the end of trading in London on September 28. Those gains were later extended in Asian trading, where Brent fetched $48.70 early on September 29.
Oil analysts said the deal was a major breakthrough as it included a major concession by Saudi Arabia to let Iran keep increasing its production to levels that prevailed before international sanctions.
To allow Iran and possibly other members of the Organization of the Petroleum Exporting Countries like Libya and Nigeria to keep increasing production from depressed levels caused by sanctions and insurgencies, Saudi Arabia — OPEC”s biggest producer — would have to actually cut production, something it has been unwilling to do since 2014.
Evidence of the breakthrough in the feud between the Saudis and Iran came as Iranian oil minister Bijan Namdar Zanganeh was the one who announced the new production limits after the meeting.
“This deal ushers in a new period of cooperation between OPEC nations and specifically between Saudi Arabia and Iran,” Kathy Lien, a managing director at BK Asset Management, wrote in a note to clients.
“While we wouldn’t be surprised by some back-pedalling between now and November, this is a historic moment and one that should have a lasting impact.”
Analysts credited the mediation of Russia, Algeria, and Qatar for settling the dispute between the two Persian Gulf rivals. Russian oil minister Aleksandr Novak for months pushed the Saudis to be more lenient with Iran, which only this year escaped sanctions that were imposed in 2012.
Angus Nicholson, analysts with the Australian firm IG Markets, said the OPEC agreement paves the way for a more comprehensive deal that includes Russia and other major producers outside the cartel at OPEC’s next meeting on November 30.
A deal that includes Russia — which is the largest producer outside the cartel and already is publicly committed to joining a production freeze with OPEC — would likely result in premium oil prices rising to the $55 range, Nicholson said in a note to clients.
With reporting by Reuters, AFP, AP, and Bloomberg
Copyright (c) 2016. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.
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