OPEC Agrees to Cut Oil Production; Pump Prices Likely to Rise

OPEC agreed to cut production for the first time in eight years, according to a delegate briefed on the matter, sending oil prices more than 6% higher as Saudi Arabia and Iran wrong-footed traders who expected a continuation of the pump-at-will policy the group adopted in 2014.

In two days of round-the-clock talks in Algiers, the group agreed to drop production to 32.5 million barrels a day, the delegate said, asking not to be named because the decision isn’t yet public. That’s nearly 750,000 barrels a day less than it pumped in August.

The deal will reverberate beyond the Organization of Petroleum Exporting Countries. It will brighten the prospects for the energy industry, from giants like Exxon Mobil Corp. to small U.S. shale firms, and boost the economies of oil-rich countries such as Russia and Saudi Arabia. For consumers, however, it will mean higher prices at the pump.

"The cut is clearly bullish," said Mike Wittner, head of oil-market research at Societe Generale SA in New York. "What’s much more important is that the Saudis appear to be returning to a period of market management."

The agreement also signals a new phase in relations between Saudi Arabia and Iran, which have clashed on oil policy since 2014 and are backing opposite sides in civil wars in Syria and Yemen. The deal indicates that Riyadh and Tehran, with the mediation of Russia, Algeria and Qatar, were able to overcome the differences that sunk another proposal to cap production earlier this year.

The stakes for OPEC, which pumps 40% of the world’s oil, are high as the International Energy Agency has warned of a weak petroleum market next year. Ian Taylor, the head of Vitol Group BV, the world’s largest oil-trading house, said that the crude market could remain oversupplied until 2018 unless producing countries stop flooding the market.

“I cannot see a good reason for a major increase in the price of oil” since the market remains “way oversupplied,” Taylor told a Bloomberg conference in London.

As OPEC agreed to limit its output, Russia smashed a post-Soviet oil-supply record, pumping 11.1 million barrels a day in September, up 400,000 from August, according to preliminary estimates. Russia participated in the Algiers talks, but it’s not party to the OPEC deal.