Oil prices soar after OPEC deal

On the stock exchange Royal Dutch Shell Plc was up 1.8% to £21.57 per share, BP Plc (LON:BP) gained 1.3% to 465.7p, meanwhile Tullow Oil plc, one of the most leveraged stocks to the oil price, rallied 4.4% to trade at 310.9p.

Breaking with years of inaction, OPEC agreed Wednesday to cut its oil output for the first time since 2008.

The OPEC decision marks a significant shift in the Saudi Arabia-led cartel’s two-year price war against US shale.

In addition to the organization’s 1.2 million barrel-a-day cut, the deal is subject to another 600,000 barrel-a-day output reduction by non-OPEC members. The Global benchmark for crude jumped 8.3 percent, or $3.86, to $50.24 on Wednesday. Investors are betting OPEC’s decision to stop flooding the world with oil will ease the supply glut that caused prices to collapse in the first place.

Cavan Yie of Manulife Asset Management says the increase in oil prices suggests markets believe the agreement is not only credible, but more importantly, doable.

“Before the OPEC decision we expected oil markets to rebalance towards end of 2017”, IEA Executive Director Fatih Birol said at a briefing in Bratislava, Slovakia.

The OPEC proposal is parts of its effort to trim 1.2 million barrel per day crude oil output in a bid to raise ongoing subdued prices. The question still remains regarding the long-term impact of the deal and the ability of OPEC to execute the cuts.

“Firstly, it is questionable whether both Opec and non-Opec members involved in the agreement will actually follow through with their own production cap and, even if they do, until when”.

OPEC members are shooting for higher oil prices.

“Today’s unity is a very explicit sign about the position of OPEC”, he added.

But the agreement in Vienna is a reminder that OPEC collective action is still possible when producers see opportunities and favorable circumstances to boost revenue. Of course, the burden will be on OPEC to actually implement the deal and take physical barrels off the market, not just promise to do so.

Very few analysts thought that OPEC would be able to pull off the deal that they just announced. Rising prices can provide a lift to the troubled economies of oil-dependent nations such as Nigeria and Venezuela, and bolster the fortunes of smaller American energy producers that have been shaken by the weakness.

Analysts are now focusing their attention on implementation of the deal, the first agreement since 2001 by the Organization of the Petroleum Exporting Countries (OPEC) and Russian Federation to coordinate production cuts. Another positive move came from non-OPEC Russia, which changed its stance from freezing production at current record-high levels to production cuts depending on technical challenges.

Then there’s Nigeria. Its output was reported at 1.628 million barrels a day in October, after attacks on pipelines. It endorsed a deal that legitimizes Saudi Arabia’s 2 million barrels a day of growth since the start of 2011.

“The peak of daily production for November was 11.231 million barrels”, Deputy Energy Minister Molodtsov told a conference in Moscow.