OPEC and Russia announced their first production cuts in eight years pushing West Texas Intermediate prices 3 percent higher in Thursday trading and a total of 12 percent since the deal was first reported to be in the works. Brent Crude also surged 4 percent to its highest price in 16 months.
The Organization of Petroleum Exporting Countries (OPEC) agree with non-OPEC producer Russia to curb output after the cartel's largest supplier Saudi Arabia accepted a reduction in its production and withdrew its demand that its political rival Iran also reduce its output. Iraq also agreed to a smaller output quota
Iran has only recently returned to the international oil markets after the lifting of U.S. and European sanctions following its agreement with major world powers led by the U.S. on its nuclear program. The Iranian deal was completed last July and took effect in January.
WTI, the U.S. crude standard ended the New York session at $51.06, up $1.62 or 3.3 percent. Its session high at $51.80 was just 13 cents below its 2016 top and the second highest quote since July 16, 2015.
Futures on Brent crude, the European and global standard gained 4.1 percent, $2.10, closing at $53.94. Prices had been as high as $54.53 a barrel, up 5.2 percent, the highest level since July 27, 2015. The premium for Brent crude, which is largely due to the cheaper distribution costs, widened to its largest in about ten weeks.
While crude prices have gone up strongly in the past two weeks, they are still about half their 2014 average, though double their 2016 low.
OPEC produces about a third of the global output of 33.6 million barrels a day. The agreement intends to reduce that by 1.2 million barrels a day starting in January 2017 to approximately the output level in January of this year.
Indonesia refused to go along with the agreement and said it will suspend its organization membership.
Saudi Arabia will take the largest portion of the cuts, reducing output by almost 0.5 million barrels to 10.06 million barrels per day. Its Persian Gulf OPEC allies, the United Arab Emirates, Kuwait and Qatar, would reduce production by a total 0.3 million barrels.
Iraq, which had resisted any cuts citing its need to fund its war against Islamic State militants, agreed to reduce production by 0.2 million barrels per day.
Iran was allowed to increase production slightly. Tehran has long sought higher output as it tries to regain market share after years of Western sanctions.
Non-OPEC producers participating in the talks agreed to reduce their production by 600,000 barrels, with Russia taking half of that. Russia had previously declined to participate in production cuts with OPEC.
Though the agreement is a necessary first step, past OPEC deals have faltered on performance, as nations have failed to live up to their production restrictions.
It is also unknown how much higher these output reductions can drive crude price with the ever more efficient U.S. and Canadian shale oil producers ready to take advantage of any sustained price increase to boost their own production.
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