OPEC agrees on oil output cut, Indonesia suspends membership to avoid cut

After eight years, members of the Organization of the Petroleum Exporting Countries (OPEC) on November 30 have agreed to cut its oil output in a bid to rebalance the market and boost commodity prices.

The agreement was made possible after Saudi Arabia accepted “a big hit” on its production as its Energy Minister Khalid al-Falih previously said they were willing to accept to get a deal done. Saudi has also dropped its demand on arch-rival Iran to slash output. Non-OPEC Russia will also join output reductions for the first time in 15 years to help the oil cartel prop up prices.

Brent crude jumped over 9% to more than US$50 a barrel as Riyadh reached a compromise with Iran and after fast-growing producer Iraq also agreed to curtail its booming output.

“I think it is a good day for the oil markets, it is a good day for the industry and … it should be a good day for the global economy. I think it will be a boost to global economic growth,” Falih told reporters after the decision.

OPEC produces a third of global oil, or around 33.6 million barrels per day (bpd), and under the recent deal, it would reduce output by around 1.2 million bpd from January 2017.

Saudi Arabia will take the lion’s share of cuts by reducing output by almost 500,000 bpd to 10.06 million bpd. Its Gulf OPEC allies – the United Arab Emirates, Kuwait and Qatar – would cut by a total of 300,000 bpd.

Iraq, which had insisted on higher output quotas to fund its fight against Islamic State militants, unexpectedly agreed to reduce production by 200,000 bpd.

Iran was allowed to boost production slightly from its October level – a major victory for Tehran, which has long argued for its need to regain market share lost under Western sanctions.

Clashes between Saudi Arabia and Iran dominated many previous OPEC meetings.

Falih had long insisted OPEC would only do an output-limiting deal if non-OPEC producers contributed.

OPEC president Qatar said non-OPEC producers had agreed to reduce output by a further 600,000 bpd, of which Russia would contribute some 300,000.

Russia, which had long resisted cutting output, pushed its production to new record highs in recent months.

A combined output reduction of 1.8 million bpd by OPEC and non-OPEC nations represents almost 2% of global output and would help the market clear a stocks overhang, which had sent prices crashing from levels as high as US$115 a barrel seen in mid-2014.

Non-OPEC Azerbaijan and Kazakhstan have said they might also cut.

Meanwhile, net oil importer Indonesia has announced the temporary suspension of its membership within the organization, just 10 months after rejoining the body, citing an inability to comply with the cartel’s decision to cut oil production.

The organization requested Indonesia cut its production by 37,000 barrels a day, more than seven times the cut the country is willing to make without risking a widening of the 2017 state budget deficit.

“This temporary suspension is the best decision for OPEC. It will allow the decision to cut 1.2 million barrels a day to be carried out, and on the other hand Indonesia would not have to comply with the decision, in line with Indonesia’s national interests,” Energy and Mineral Resources Minister Ignasius Jonan said in the statement.

The country has a production target of 815,000 bpd in 2017, down 0.6% from 820,000 bpd in 2016. A 10,000 bpd cut could increase the country’s budget deficit by up to Rp2.2 trillion (US$162 million), government data showed.

Still, Indonesia could enjoy a windfall from oil price increase next year, Jonan said.

Indonesia first suspended its membership in OPEC in 2009 after the country became a net importer of oil as dwindling exploration investment undermined the country’s oil production. At its peak, Indonesia was capable of producing 1.7 million bpd, more than twice of its current capacity.

It rejoined in January with the hopes of influencing global oil policy.