Oil soars on possible cut in production

29/01/2016 10:07 AST

Oil rose yesterday after a Russian official said that Saudi Arabia had proposed that oil-producing countries cut output by up to 5% each, amid a global supply overhang that has depressed prices for over a year-and-a-half.

Crude accelerated higher after Russian Energy Minister Alexander Novak revealed the proposed reductions in output, which would amount to about 500,000 barrels a day of cuts by Russia, one of the largest producers outside Opec.

If implemented, the output reductions could help ease a supply glut that caused oil prices to fall more than 60% since mid-2014. Prices hit their lowest level for more than 12 years last week.

Novak’s comments helped send Brent crude up more than 8% to almost $36 a barrel and US crude up almost as much to crest just below $35.

A turnaround in oil’s fortunes would be welcomed by oil-rich countries where the price collapse has caused budget squeezes and political turmoil with some even forced to devalue their currencies.

“Indeed, these parameters were proposed, to cut production by each country by up to 5%,” Novak said. “This is a subject for discussions, it’s too early to talk about.”

Saudi Arabian officials did not immediately comment on the proposal but a senior Gulf Opec delegate said: “Gulf Opec countries and Saudi Arabia are willing to co-operate for any action to stabilise the international oil market.”

The proposal did not come directly from Saudi Arabia but rather from Opec members Venezuela and Algeria, one Gulf Opec source said.

Oil sank to 12-year lows of around $27 a barrel earlier this month, from as high as $115 some 18 months ago, because of a US shale oil boom and a decision by Opec to pump more to fight for market share against higher-cost producers.

But cheap oil has caused economic pain in many producer countries. In Saudi Arabia it has pressured the currency and opened up a record state budget deficit of around $100bn.

In Russia, the rouble hit an all-time low, street protests have flared in Azerbaijan and investors are concerned about a potential debt default by Opec member Venezuela.

Novak also told reporters there was a proposal for a meeting between the Organisation of the Petroleum Exporting Countries and non-Opec nations at the oil minister level and that Russia was ready for such talks.

“There are lots of questions about the oversight over cuts,” he added.

Saudi Arabia has repeatedly called on non-members to contribute to output cuts if they want the organisation to help producers deal with the oil glut with the world running out of space to stockpile unwanted crude.

Russia has long rebuffed the idea of cuts saying its fields were different from those in the Gulf and are difficult to shut.

“You have to take this seriously now. Key will be if Russia can deliver,” said Gary Ross, a veteran Opec watcher and founder of US-based Pira group.

Brenda Kelly, head analyst at London Capital Group, said the proposed cuts were unlikely to happen.

“There have been attempts in the past that have come to (nothing). Saying something about the oil price and doing something are very different things, and it seems like panic given the price drop,” she said.

Reuters