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OPEC deal to cut production boosts Houston, Texas oil industry

Production cuts likely to bolster global oil prices, help local firms

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The Houston oil industry received a major boost Wednesday from OPEC's agreement to curb crude production for the first time in eight years, a move that could accelerate the industry's recovery after a two-year downturn that bottomed out in May.

U.S. crude had its biggest daily price gain in more than seven years, climbing $4.21, or nearly 10 percent, to settle at $49.44 after members of the Organization of the Petroleum Exporting Countries agreed to cut production by 1.2 million barrels a day during meetings in Vienna.

The deal is contingent on non-OPEC producers also agreeing to cut production by 600,000 barrels, but Russia has already said it would reduce its production by 300,000 barrels.

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The accord represents good news for Houston and Texas, which shed over 100,000 oil and gas jobs during the bust, considered the worst in 30 years. The production cut, coupled with solid global energy demand, could help end the worldwide oil glut and push crude above $60 or even $70 a barrel next year, said David Pursell, a managing director and research manager at Houston energy investment bank Tudor, Pickering, Holt & Co.

"This means 2017 will be a better year for oil and gas activity than we anticipated," Pursell said. "It's really good for Houston and the white-collar jobs."

It was also very good for energy stocks. Shares of Houston oil and gas companies surged Wednesday. Marathon Oil's stock price jumped 21 percent, Anadarko Petroleum's climbed 15 percent, and ConocoPhillips' and EOG Resources' each increased 10 percent.

Shares of Halliburton, the oil field services company and recognized leader in hydraulic fracturing, leaped by 11 percent.

"This is a huge shift and this is what the market has been waiting for from OPEC since 2014," said Jamie Webster, a fellow at Columbia University's Center on Global Energy Policy. "OPEC did assert that it's not dead."

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Cautious optimism

Some observers expressed caution about the longer term outlook. Bill Herbert, a senior energy analyst at Piper Jaffray & Co., said the agreement should help create more jobs and prosperity in the oil patch, especially in the productive Permian Basin in West Texas and, to a lesser extent, in South Texas' Eagle Ford shale, where oil is more expensive to extract.

Most companies can make money if oil prices rise to the mid-$50-per- barrel range, he said, but they could also end up pumping too much, again flooding the market with oil and pushing prices back down.

"It's good now," Herbert said. "The issue is how sustainable it is, and we're going to find out."

Analysts added it's likely to take time for the impact of higher oil prices to filter into the broader economy. The number of drilling rigs operating in Texas has slowly increased for months as prices moved off the bottom of $26 a barrel reached in February. It typically takes about three months for the rig count to respond to oil pricing, and even more time for companies to resume hiring, said Jesse Thompson, business economist with the Houston branch of the Federal Reserve Bank of Dallas.

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The Dallas Fed forecasts that the Texas rig count won't grow rapidly until crude prices rise to at least $55 a barrel and stay there.

Significant job growth could take even longer because of widespread layoffs and the extended nature of the downturn, Thompson said. Many workers have left the industry permanently, meaning it will take more time for companies to recruit employees and ramp up operations.

"It takes a little while for all that to get underway," Thompson said.

Dissecting OPEC

The OPEC deal was unanimous after Indonesia was suspended from OPEC for its inability to agree to a production cut. The six-month deal, which OPEC could extend by another six months, begins in January to cut OPEC production to 32.5 million barrels daily, including Indonesia's October levels. Saudi Arabia is making the biggest cut, agreeing to reduce its production levels by nearly 500,000 barrels a day to about 10 million.

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Iran, Saudi Arabia's chief rival, only agreed to a production freeze - not a reduction - after boosting its output since the U.S.-Iran nuclear accord that lifted international sanctions on Iran. Iraq agreed to 210,000-barrel cut, while Kuwait and the United Arab Emirates each agreed to curtail production by more than 100,000 barrels.

Saudi Arabia, which earlier resisted intervening in the market, has come under increased pressure to act as low oil prices have forced it to burn through about a quarter of its financial reserves to maintain government spending. A deal was finally reached after several stops and starts at previous OPEC meetings.

"The Saudis balked," said Stewart Glickman, a stock analyst with CFRA Research, a New York investment research firm.

The oil bust really kicked in two years ago after Saudi Arabia decided to increase crude production despite falling oil prices. Seeking to maintain market share against the rise of U.S. shale producers, Saudi Arabia abandoned its traditional role of managing output to control prices, which, combined with booming U.S. production, led to a global glut of oil.

U.S. oil prices peaked at $107 a barrel in June 2014, but plunged to a low of $26 per barrel in February. The drop crippled U.S. oil producers and services companies, but also forced many to become more efficient and even fiercer competitors, foiling the Saudi strategy of pumping them out of business.

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"OPEC kind of put U.S. producers through a two-year boot camp," Glickman said.

Analysts cautioned that it will likely take months to determine whether the Vienna agreement reduces the amount of oil coming onto the market. First, the non-OPEC nations led by Russia, which meet Dec. 9, must decide whether to accept a 600,000 barrel a day production cut on which the OPEC deal is contingent.

In addition, it won't be known until mid-February, when OPEC nations report production figures, whether cartel members are sticking with the agreement. "If history is any guide, we should not expect full compliance," said Jim Burkhard, head of oil market research at consulting group IHS Energy.

In announcing the deal, OPEC leaders said they wanted to make a statement that the worst of the oil bust is past and they're working to revive the industry through their "historic" agreement.

"We have made great success today," said Mohammed Saleh Al Sada, Qatar's energy minister and president of the OPEC conference. "We came to the understanding that the market needs to be rebalanced."

Lydia DePillis and David Hunn contributed to this report.

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