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Saudis to Take 'Big Hit' as OPEC Agrees First Output Cut Since 2008

Saudis to Take 'Big Hit' as OPEC Agrees First Output Cut Since 2008
With Saudi Arabia accepting "a big hit" on its production and agreeing to arch-rival Iran freezing output at pre-sanctions levels, OPEC has agreed its first limit on oil output since 2008, sources in the producer group were quoted by the media as saying.
After Riyadh signaled it had finally reached a compromise with Iran after insisting in recent weeks that Tehran fully participate in any cut, brent crude futures jumped 8 percent to more than $50 a barrel.
Sources reportedly told the media that OPEC member Algeria proposed to reduce production by around 4.5 percent, or about 1.2 million barrels per day and the oil cartel agreed on the proposal.
While Iran would freeze output at close to current levels of 3.797 million bpd and other members would also cut production, Saudi Arabia would contribute around 0.5 million bpd by reducing output to 10.06 million bpd, sources said.
The exact combined reduction was yet to be calculated as the OPEC had also suspended Indonesia from the group, sources said.
"OPEC has proved to the skeptics that it is not dead. The move will speed up market rebalancing and erosion of the global oil glut," said OPEC watcher Amrita Sen from Energy Aspects.
Hopes that Russia and other non-OPEC producers would contribute a reduction of another 0.6 million bpd and OPEC was indeed focusing on significant cuts was expressed by Saudi Energy Minister Khalid al-Falih before the meeting.
"It will mean that we (Saudi) take a big cut and a big hit from our current production and from our forecast for 2017," Falih said.
Many previous OPEC meetings had been dominated by clashes between Saudi Arabia and Iran. But with Iranian Oil Minister Bijan Zanganeh saying he was positive since Iran had not been asked to cut output, the tone changed on Wednesday.
He also said Russia was ready to reduce production.
"Moscow have agreed to reduce their production and cut after our decision," Zanganeh said.
Preliminary agreement in Algiers in September to cap output in an effort to prop up oil prices, which have halved since mid-2014, was made by OPEC, which accounts for a third of global oil production.
As their output has been crimped by unrest and sanctions, OPEC said it would exempt Iran, Libya and Nigeria from cuts.
The September deal was seen as a victory for Iran. To regain market share lost under Western sanctions, when Saudi Arabia increased output, it wants to raise production, Tehran has long argued.
OPEC expected Russia to cut by 0.4 million out of additional non-OPEC cuts of 0.6 million bpd, sources were quoted as saying. A Russian ministry source said the figure was "a bit excessive".
Claiming that it needs more money to fight the militant group Islamic State, OPEC member Iraq has also been pressing for higher output limits.
Only slightly behind long-time leader Saudi with 10.5 million bpd, Iran and Iraq together produce over 8 million bpd.
"If you get this deal done, it would be huge. You remove a lot of oil from the market and you get the Russian participation," said veteran OPEC watcher and founder of Pira consultancy Gary Ross.
Compliance with cuts would be key: "In deals with Russia, OPEC is like (the late U.S.) President (Ronald) Reagan used to say: 'Trust but verify'", said Bob McNally, president of Washington-based consultancy Rapidan group, on Twitter.

Christopher J. Mitchell

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