OPEC beats the odds by delivering deal to cut oil output

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Members of the Organization of Petroleum Exporting Countries really had the simplest of tasks on Wednesday – come up with something resembling a deal and shout it from the rooftops.

On those scores alone, OPEC more than did the job. Had the ministers left the much-anticipated Vienna meeting in a huff with no agreement to cut output levels, as they did in Doha last spring, oil prices could have tumbled well into the $30s (U.S.) a barrel. A day earlier, simmering worries – that the agreement could unravel – pressured markets.

Instead, the group trumpeted its rekindled cohesiveness from the banks of the Danube in the form of a 1.2-million-barrel-a-day reduction, the high end of its proposed range. Crude rocketed up more than 8 per cent, with international benchmark Brent leaping above $50.

Read more: Canadian energy stocks jump on pipeline approvals, OPEC news

Read more: Oil jumps over 10% as OPEC finalizes output cut deal

For Canada's oil patch, the OPEC deal made for an unusually gleeful few hours. It came on the heels of long-sought pipeline approvals by Ottawa, including that of Kinder Morgan's Trans Mountain expansion that will triple capacity to move Alberta oil to the Pacific coast.

Together, the developments lit a bonfire under the shares of Canadian energy producers. The S&P/TSX capped energy index surged 8 per cent in a stark contrast from the gloom that's hovered over the industry and its prospects for the past couple years.

How much of the day's gains are due to a real hit to global inventories when the deal comes into force on Jan. 1, and how much are from sentiment and the need to cover short positions is far from clear. OPEC didn't make parsing the information easy.

The agreement is not an easy-to-understand, across-the-board reduction in output. In fact, hours after the closing news conference, analysts were still trying to make sense of the numbers. Yes, there are cuts. But there are also some freezes, a couple of exemptions and at least one increase, among the cartel's members. One country, Indonesia, has had its membership suspended.

Russia is among non-OPEC producers that have agreed to make their own cuts, providing members of the cartel stick to their allocations. It is targeting 300,000 barrels a day.

OPEC in September agreed in principle to abandon its nearly two-year-old price war aimed at U.S. shale oil producers and other competitors, as the group's oil-dependent economies sputtered. Since then, it's been a guessing game over whether the fractious cabal could agree to individual quotas. There had been widespread concern about Saudi Arabia, the most prolific producer, and Iran, emerging from years of sanctions, playing nice amid long-standing tensions.

At stake is the ability of the market to winnow down the glut that had weighed heavily on prices as OPEC had pumped ever more oil month after month and demand came into question.

Saudi Arabia is doing the lion's share of the heavy lifting in the deal, agreeing to reduce output by 486,000 barrels a day from 10.54 million in October. The timing works well, as the kingdom's output normally has a seasonal drop between November and February. The five-year average fall during the period is about 250,000 barrels a day.

Iraq and Kuwait consented to reducing output by 210,000 and 313,000 barrels a day respectively. Libya and Nigeria have no specific allocations, given the unrest in those countries. Iran's production will be allowed to rise by 90,000 barrels a day.

So it's a cut, OPEC-style – with some freezes and increases.

The important things to watch for will be compliance among the members, especially if oil prices creep up to make extra revenues all-too-attractive, and how long it will take for global supply and demand to come back into balance.

A few months ago, leading forecasters had projected that could happen by the end of 2016, but as the year dragged on and fundamentals worsened the estimates were pushed back to second half of 2017.

For now though, just OPEC's agreement to agree – and participation by Russia – is more than enough to bring euphoria to what had been a dreary market. Canada's energy companies and the Alberta government – both in need of the boost – won't overthink the details just now.