Oil price soars after OPEC nations agree to cut production

OPEC President Mohammed bin Saleh al-Sada and secretary-general Mohammad Barkindo (Reuters)
OPEC President Mohammed bin Saleh al-Sada and secretary-general Mohammad Barkindo (Reuters)

The price of oil has soared on world markets after OPEC nations agreed to their first production cut in eight years.

The 14 members of the Organisation of the Petroleum Exporting Countries will cut production by about 1.2 million barrels a day, from the current level of around 33.7 million barrels per day.

That is a reduction in output of 4.5 percent. The OPEC nations collectively account for about 40 percent of global oil production. 

Non-OPEC member Russia has also agreed to cut its production for the first time in 15 years.

The news saw crude oil prices rally on world markets, more than offsetting yesterday's sharp losses.

West Texas crude prices rose 8 percent to US$48.93 per barrel. Brent crude gained 8 percent on the European markets, trading at US$50.12 per barrel.

A production cut had looked uncertain 24 hours ago, with both Iran and Iraq reluctant to reduce their output. Between them they account for around 24 percent of OPEC's output, with Iraq producing 13.5 percent of OPEC's oil and Iran accounting for 11.8 percent.

Iran had been reluctant to agree to a production cut, arguing it is still trying to make up for the market share it lost during the time it faced Western trade sanctions.

Iraq had also wanted to be exempted from the cuts due to its conflict with Islamic State.

Although the OPEC nations have agreed to a collective production cut, the details are still being negotiated to determine how much each nation will reduce its production.

It appears Saudi Arabia will take the burden for the majority of the production cuts. It is expected that Iran will freeze its current production at around 3.8 million barrels a day.

Saudi Arabia, which is OPEC's de facto leader, produces 31 percent of OPEC's oil.

Analysts say the deal could keep crude oil prices above US$50 a barrel. But they are divided over the longer-term path for prices.

OPEC nations hope prices could rise to between US$55 and US$60 per barrel. But that is uncertain. If prices rise it makes the US shale producers more competitive, meaning an increase in production from the American producers.

At the same time President-elect Donald Trump is promising to curb regulations on US producers and cut corporate tax rates. This would also give the US oil companies a boost.

Russia has said it will also cut its production by 300,000 barrels per day. It currently produces more than 11 million barrels a day.

There are some reports the starting point for Russia's planned production cut will be from its intended levels for 2017. That could mean that in practical terms it will not curb its production, but instead will hold it at current levels.

This is one of the reasons that some analysts are doubtful about the impact of the OPEC deal on future crude oil prices.

Crude oil prices are a major influence on the pump prices in New Zealand. But they are only part of the equation.

New Zealand's fuel companies import refined fuel. The refined price is more expensive than the crude price, but it does tend to move up or down in line with crude oil.

New Zealand pump prices are also impacted by the New Zealand dollar, which fell overnight by 0.69 percent to sit at 70.79 US cents at 6am.

Transportation costs, importer/retailer margins and taxes also add to the cost of the local petrol and diesel prices.

The standard national price for diesel is sitting at $1.219 per litre, and the 91 unleaded price is $1.919.

However in some areas, like Auckland, there are hefty discounts of as much as 10 or 20 cents per litre.