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OPEC reaches deal to cut output by 1.2 million barrels, a first since 2008

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OPEC's 14 members produce a third of the world's oil (AFP Photo)
OPEC's 14 members produce a third of the world's oil (AFP Photo)

The OPEC oil cartel defied expectations Wednesday and nailed down its first joint output cut since 2008 after tough talks in Vienna, sending oil prices soaring.

At 1622 GMT Brent North Sea crude for January delivery was up $3.77 at $50.15, the first time it has risen above $50 in a month. West Texas Intermediate was up $3.98 at $49.21.

The accord announced by the Organization of the Petroleum Exporting Countries is aimed at reducing a global supply glut that has kept prices painfully low.

It represents a dramatic reversal from OPEC's Saudi-led strategy, introduced in 2014, of flooding the market to pressure rivals, in particular US shale oil producers.

The cartel will lower its monthly output by 1.2 million barrels per day (bpd) to 32.5 million bpd from January 1, Qatar's energy minister and president of the OPEC conference said.

"This is a major step forward and we think this is a historic agreement, which will definitely help rebalance the market and reduce the stock overhang," Mohammed Bin Saleh Al-Sada told a news conference in Vienna.

He also said that the deal will help lift global inflation accelerate to a "more healthy rate," including in the United States.

Non-OPEC Russia will also join output reductions for the first time in 15 years to help the Organization of the Petroleum Exporting Countries prop up oil prices.

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

Iran and Russia are effectively fighting two proxy wars against Saudi Arabia, in Yemen and Syria, and many sceptics had said the countries would struggle to find a compromise amid frosty political relations.

Saudi Energy Minister Khalid al-Falih said ahead of the meeting that the kingdom was prepared to accept "a big hit" on production to get a deal done.

"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," he told reporters after the decision.

Saudi Arabia will take the lion's share of cuts by reducing output by almost 0.5 million bpd to 10.06 million bpd. Its Gulf OPEC allies - the United Arab Emirates, Kuwait and Qatar - would cut by a total 0.3 million bpd.

Iraq, which had insisted on higher output quotas to fund its fight against Daesh, unexpectedly agreed to reduce production - by 0.2 million bpd.

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

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

"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.

He said oil could rise to $55 per barrel.

WILL OPEC COMPLY?

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

OPEC president Qatar said non-OPEC producers had agreed to reduce output by a further 0.6 million bpd, of which Russia would contribute some 0.3 million.

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

"Russia will gradually cut output in the first half of 2017 by up to 300,000 barrels per day, on a tight schedule as technical capabilities allow," Russian Energy Minister Alexander Novak told a briefing in Moscow.

Novak, who spoke an hour after OPEC announced its deal, did not say from which output levels Russia would cut.

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

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

OPEC suspended Indonesia's membership on Wednesday since the country, a net importer, could not cut output, Qatar said.

The move will not affect OPEC's overall reduction as Indonesia's share of cuts will be redistributed among other members.

Bob McNally, president of Washington-based consultancy Rapidan group, said on Twitter that 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'."

OPEC will hold talks with non-OPEC producers on Dec. 9. The organization will also have its next meeting on May 25 to monitor the deal and could extend it for six months, Qatar said.

Budget pain

While consumers might not welcome the more expensive fuel that the deal would bring, OPEC members' public finances have been shot to bits by two years of rock-bottom prices.

It has exacerbated an already desperate situation in Venezuela, where Human Rights Watch says shortages of basics are so bad that there is a "profound humanitarian crisis".

Even fabulously wealthy Saudi Arabia has slashed salaries and spending and is on course for a budget deficit of $87 billion in 2016, and owes foreign firms billions in unpaid bills.

The low crude price has also hit investment in oil facilities, raising the prospect of oil shortages further down the line.

However, further downwards pressure on oil prices could come from the United States and president-elect Donald Trump, whose policies could see a renewed rise in U.S. oil production.

Trump has promised to eliminate regulations restricting fracking, support oil and gas pipeline construction and open restricted federal lands and offshore areas for exploration, including Alaska.

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