Oil prices soar on OPEC plan to lower production

Tony Starkey, manager of energy analysis at Platts Analytics, said the OPEC cuts should bring supply and demand closer into balance in 2017, thus allowing oil prices to rebound next year.

The OPEC countries’ economies and government finances have suffered in the past two years following a price crash in 2014, which analysts said was the major reason why the group finally overcame differences among themselves. It was also assumed by many that longer-cycle high-cost producers would soon begin slowing.

Iraq’s Minister of Oil Jabar Ali al-Luaibi speaks to journalists at OPEC’s 171st Ordinary Meeting in Vienna, Austria on Monday, Nov. 28, 2016.

Saudi Arabia’s Khalid al-Falih said that his country was prepared to take on much of the burden in order to conclude the deal, but only if other countries offered something as well. “It will mean that we (Saudi) take a big cut and a big hit from our current production and from our forecast for 2017”. To put that into context, peak oil prices were $145 per barrel, seen in July 2008.

More specialized oil companies, particularly drillers and oil exploration companies and companies who support drillers, soared.

“I believe that the amount of increased domestic production will correlate almost perfectly with the increase in the price of oil”.

“We are surprised by the move, having previously thought that anything short of full participation would kill a deal [among OPEC members]”, CFRA Research analyst Stewart Glickman wrote in a note to clients.

The move, which will leave OPEC output at 32.

The OPEC deal “will provide some price momentum but it can not be compared with the cut seen back in 2008”, a Singapore-based trader said, referring to the last OPEC production cut at 4.2 million bpd. Asked about the non-OPEC contribution, OPEC President Mohammed Al-Sada said that he is confident that they “can get 600,000 barrels per day out of them…maybe more”. “The Iranians are the clear-cut winners under the deal with the country able to increase its production to around 3.8 million barrels a day”. He also claimed that non-OPEC oil nations “already have agreed to cut after our decision”.

So oil prices may have shot up 8% on Wednesday with the West Texas Intermediate future at $49 – but that is still a lowly oil price gain of less than $4 on what has been a historic day for OPEC. Combined, the cuts will amount to two percent of global production.

Meanwhile, several doubts surrounded the air following the OPEC meeting.

Also worth highlighting, Iran has been given permission to increase production by a few notches from its October standing – securing a strong win for the Tehran side – in recovering its market share lost previously under Western embargoes.

“The cut by OPEC will be largely offset by increases in USA production where the rig count has already increased”, said India Oil Corp’s Director of Finance A K Sharma.

But it’s a lot too soon to assume what the effect of OPEC will be, said Investing.com senior editor Clement Thibault.

“OPEC has done its best to stabilize the market in the $50-$60 price range, but if they fail to deliver in the coming months, make no mistake, oil prices will fall well below the $40 mark again”.

OPEC acknowledged that Jakarta had suspended its membership. “It’s one of the reasons I find the immediate reaction somewhat premature”.

Material from the Associated Press was used in this report.