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OPEC scrambles to agree crucial oil output cut

Non-OPEC output has helped feed a massive global supply glut that has led to a dramatic fall in oil prices since 2014, severely hurting producers/AFP

OPEC members want non-cartel producers, particularly Russia to also tighten the taps/AFP

VIENNA, Austria, Nov 28 – OPEC members will seek to give oil prices a boost in Vienna on Wednesday by nailing down their first output cut in eight years, although a deal is far from certain.

Failure to get an accord could send oil prices tumbling and reignite debate about the purpose of the 56-year-old Organization of the Petroleum Exporting Countries.

Not getting a deal “could be the end of OPEC”, energy analyst Alexandre Andlauer told AFP. Pessimism about prospects for an agreement sent oil prices lower on Friday.

In September the cartel agreed in principle to lower production to 32.5-33.0 million barrels per day (bpd), meaning a cut of between 600,000 and 1.1 million bpd.

This, OPEC’s 14 members hope, will reduce the mammoth global supply glut and so increase the market price of oil from its current painful level of below $50 a barrel.

It also marks a reversal of OPEC kingpin Saudi Arabia’s two-year-old strategy of flooding the market to squeeze out rivals, in particular US shale oil producers.

Saudi Energy Minister Khalid al-Falih, who was due in Vienna for the talks with other OPEC ministers, said this month an agreement was “imperative”.

Devil in the detail

But it remains to be agreed what size cuts, if any, each of OPEC’s members will make, particularly Iraq and Iran, the cartel’s next-biggest producers after Riyadh.

Strife-torn Libya on Sunday ruled itself out of any cuts, arguing that it was in “such a dangerous economic situation” that there was no way it could take part.

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Iraq has said it will cut output but that it is short of money needed to fight Islamic State extremists. It also disputes with OPEC the level of its current output.

Iran, newly free of export restrictions since last year’s nuclear deal, says it won’t cut production until it has reached pre-sanctions levels.

Adding to the difficulties is the fierce rivalry between Shia Iran and Sunni Saudi Arabia, engaged in a proxy war in Yemen and backing different sides in Syria.

Russia on board? 

As the meeting has approached, OPEC members turned their sights on non-cartel producers, particularly Russia, for a pledge they would also tighten the taps.

Securing a commitment from non-OPEC nations is important because the cartel only produces about a third of the world’s oil, meaning its ability to influence prices is limited.

Algeria’s oil minister said in Iran this weekend that OPEC is prepared to cut production by 1.1 million bpd if non-members reduce by 600,000 bpd, local media reported.

President Vladimir Putin said last week Russia was ready to “freeze production”, but stopped short of promising a cut.

Russia, its finances hit by low oil prices and Western sanctions, is pumping some 11 million bpd, more even than Saudi Arabia and at levels not seen since Soviet days.

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In a sign of ongoing tensions, Saudi Arabia pulled out of talks due Monday with non-OPEC producers including Russia ahead of the Vienna meeting, Bloomberg News reported.

The news agency said Sunday that Algeria and Venezuela’s oil ministers would travel to Moscow on Monday to try to get Russia on board.

Prices at the pump

If OPEC does manage to get a deal and oil prices rise though the increase may be modest then this will hit the wallets of billions of consumers worldwide.

But higher oil prices might actually help the global economy, according to research by Goldman Sachs published by Bloomberg.

This is because richer oil producers would then pump more liquidity into the global financial system.

Low oil prices have blown a massive hole in producers’ finances in recent years, hurting not just more vulnerable OPEC members like Venezuela and Nigeria but even the Gulf states.

Saudi Arabia, once seen as fabulously wealthy, is projecting a budget deficit of $87 billion in 2016. It has slashed spending and salaries and owes private firms billions of dollars.

Two years of low prices have also hit investment in oil facilities, raising the prospect of supply problems in the medium term, experts say.

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