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The Organization of the Petroleum Exporting Countries (OPEC) is meeting to discuss supply policy in Vienna.

Leonhard Foeger/Reuters

Oil producers led by Saudi Arabia and Russia agreed on Thursday to cut output by an extra 500,000 barrels a day in the first quarter of 2020 but stopped short of pledging action beyond March.

The countries involved pump over 40% of the world’s oil, and their new combined cuts amount to 1.7 million bpd or 1.7% of global production.

A panel of energy ministers representing the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers led by Russia recommended the deeper cut on Thursday, Russian Energy Minister Alexander Novak said.

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“We really do see some risks of oversupply in the first quarter due to lower seasonal demand for refined products and for crude oil,” Novak said.

Details of the agreement and how the cuts will be distributed among producers still need to be ratified at a meeting in Vienna of OPEC and non-OPEC nations on Friday.

OPEC’s held a meeting that stretched nearly six hours on Thursday, and ministers left without giving any details on what was discussed.

Kuwaiti Oil Minister Khaled al-Fadhel said there was a deal, but declined to give any details.

Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said OPEC could not say it had an agreement until it met with non-OPEC producers on Friday.

The length of the meeting prompted OPEC to cancel plans for a news conference and a gala dinner for delegates aboard a boat on the Danube.

Some OPEC ministers, concerned that a slowing economy could hurt demand, had called for a deal that would last until June or December 2020. At their last meeting in July, OPEC and partners agreed to an extension of nine months.

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The latest deal represents a compromise between de facto OPEC leader Saudi Arabia and Russia, the world’s top oil exporters. Sources have told Reuters Moscow was reluctant to deepen cuts while Riyadh wanted them deeper and longer.

Saudi Arabia needs higher oil prices to support its budget and the initial public offering (IPO) of state oil firm Saudi Aramco, which is expected to begin trading this month.

On Thursday, the IPO was priced at the top of its price range, raising $25.6 billion and making it the world’s biggest IPO.

Russia and Saudi Arabia have led OPEC+ agreements to voluntary reduce supply since 2017 to counter booming output from the shale fields of the United States, which has become the world’s biggest producer and is not taking part in cuts.

Producers face another year of rising output from the United States along with other non-OPEC producers Brazil and Norway.

COMPLIANCE

Another complication for OPEC as it attempts to measure what it should pump this year is that two members, Iran and Venezuela, are under U.S. sanctions that have severely constrained their ability to export.

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Iran, Libya and Venezuela are exempt from cutting output while OPEC’s other 11 members are participating.

Novak said on Thursday OPEC+ producers would meet again in March to decide policy, when factors could include the run-up to November’s U.S. presidential election.

OPEC’s cuts have supported oil prices at around $50-$75 per barrel over the past year. Brent crude futures on Thursday extended this week’s gains to trade above $63 per barrel.

The deal agreed on Thursday “should ensure a $60-$65 Brent oil price in the seasonally weak period of next year,” said Gary Ross, founder of Black Gold Investors.

OPEC sources said Riyadh, which has been cutting more than required to help OPEC+ meet its overall target, was pressing Iraq and Nigeria to improve their compliance with quotas. Full compliance could provide an additional reduction of up to 400,000 bpd.

“Saudi Arabia is pushing for deeper cuts to try and shore up prices. However, deeper compliance is imperative and hence the deal will last only for one quarter so that they can assess compliance then,” said Amrita Sen, co-founder of Energy Aspects.

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Novak also said OPEC agreed to allow all OPEC+ members to exclude condensate from their oil output calculations, same as OPEC does with its own figures. Condensate is a high-value light type of crude oil extracted as a by-product of gas production.

For Russia, it means that some 760,000 bpd of condensate would be excluded from calculations, meaning Russian baseline production used for cuts would decline to around 10.66 million bpd from 11.42 million.

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