Oil soars, Brent hits 16-month high after OPEC output deal

Under the deal, their output will be reduced by 1.2 million barrels per day starting in January, the first time since 2008 that OPEC nations have agreed to cut production.

“Higher prices, however, are likely to cause more USA shale producers to increase production”, writes the Wall Street Journal.

OPEC members reached a deal on November 30 to decrease oil output by 1.2 mb/d – a huge step which led to 8.5-percent growth in oil price.

“This market defying cut will be the firstÂ in eight years, a critical move which has ensured Opec maintains some credibility”, he said in a statement yesterday.

In 2014, OPEC adopted a pump at will policy opting to let the market set the price of oil at the behest of United States ally Saudi Arabia, causing global oil prices to tumble by more than 50%.

Although it still produces about one-third of global oil, “the influence of OPEC in the global energy landscape is weakening”, said Liu Ligang, chief China economist of Citi Group.

Iraq will be reducing oil output by 200,000 barrels a day to around 4,350,000 barrels per day from January 2017.

Although OPEC’s decision to take 1.2 million bpd off the market as of January is undoubtedly good news for the US shale patch, companies would likely wait to see if oil prices would materially stabilize next year before resuming en-masse drilling, analysts polled by Platts reckon.

The average price of a gallon of unleaded gas in Lincoln rose 3 cents from Thursday to Friday, going from $2.08 to $2.11. It will help bring forward the rebalancing of oil markets.

But continuous cost reductions have allowed the latter to survive the prolonged oil price downturn albeit with a curtailed market share, while ballooning budget deficits among OPEC members eventually forced them to give up the strategy and agreed to cut production to balance the oversupplied market.

A wire report mentioned that Algeria, Venezuela and Kuwait have agreed to monitor compliance of the OPEC agreement. With these new plans in place, the boost in oil prices and its effect on revenues will ensure that there’s now a wider platform to build on.

Meanwhile US bank Morgan Stanley said that “skepticism remains on individual countries’ follow-through (on the cut), which is keeping prices below year-to-date highs (of $53.73 per barrel in October) for now”.

But analysts said that the cuts are likely to cause other producers, especially USA shale drillers, to increase output.

The other force that could limit oil’s rise is the wall of American shale oil just waiting to be pumped now that prices are higher.