Oil prices surge as OPEC reaches agreement to cut oil production

Oil producing nations on Wednesday agreed on the first joint output cuts by Opec and non-Opec producers in 15 years and the first output cut by Opec since 2008, which pushed crude oil prices by around 10 per cent.

Post-announcement, the price for Brent crude futures – which represents the Global benchmark for oil prices hiked all the way above 10 per cent, standing at USD51.88 per barrel, Reuters reported.

01 de diciembre de 2016, 12:20Tehran, Dec 1 (Prensa Latina) Iran praised today that the “economic sense” prevailed in the decision of the 171 ordinary ministerial meeting of the Organization of Petroleum Exporting Countries (OPEC) of reducing production as of 2017.

Opec’s three largest producers-Saudi Arabia, Iraq and Iran-overcame disagreements to reach Wednesday’s landmark deal in a bid to drain record global inventories and bolster the price of crude.

“OPEC has delivered an agreement”, said Jason Gammel of US investment bank Jefferies.

“I don’t think (the market) had priced in how committed OPEC turned out to be at the very last minute to getting something over the line which I think caused a surge in trading volumes”, said Jeffrey Halley, senior market analyst at futures brokerage OANDA.

West Texas Intermediate could rise by $6 above the bank’s current forecast of $55 a barrel and $56.50 for Brent in the first half of 2017, Goldman Sachs said in a November 30 note. This agreement follows an earlier meeting held in September in Algeria were each member country reached a consensus on the need to cut production.

However, it is optimistic that the oil market could stage a fundamental rebound, albeit on a more gradual basis, with a supply crunch ahead expected as soon as end 2017. In October, OPEC supply stood almost 1.3 million bpd above a year ago.

“If oil prices traded in the range of $50-$60, shale isn’t likely to return in massive levels, however if prices spiked above $60 then the shales industry will return as a major player to rebalance prices”, said Sayed in the note to clients.

It is expected that higher prices will encourage further drilling and shale oil production in the US which will drive prices down once again as supply replenishes in the market. Non-member Russian Federation agreed to curtail output by as much as 300,000 barrels a day.

Saudi Arabia, the group’s biggest producer, will see its output decline by nearly 500,000 barrels a day.

Oil prices increased five percent to $49.10 a barrel this morning after Saudi Arabia announced it was close to a deal on production – the prices having fallen four percent the previous evening.

Using IEA forecasts as an input, we estimate that crude consumption may exceed production by around 400mbpd in 1Q17 and 1,300mbpd in 4Q17 if the deal is extended and the new OPEC quotas are respected; the difference may be even higher if non-OPEC members join the deal, Fitch said.