Following a meeting in Algeria on Wednesday, Opec has committed to reducing oil output to between 32.5m barrels a day and 33m barrels a day. This is the first time in eight years that there has been an agreement to bolster oil prices and, consequently, Brent crude (the global oil benchmark) rose $2.84 a barrel to $48.85. However, it dipped slightly by 37 cents to $48.32 Thursday morning as traders took profits following the gains they made overnight.
This came as welcome news for energy stocks which experienced significant gains. For instance, in Australia, the S&P/ASK 200 energy index surged 5.7 per cent, on track for its biggest rise since mid-April. Wall Street saw the S&P rise 0.5 per cent on Wednesday and the energy sector rose 4.3 per cent, its best day since January. However, there are still some concerns surrounding the lack of detail on how much each producer will limit output. According to analysts’ estimates compiled by OPEC, the new production target is a decrease of between 240,000 barrels per day and 740,000 barrels per day. OPEC’s next formal ministerial meeting is scheduled for November where a committee, which is to be set up soon, will report its proposals on how to split the reduction in production amongst members.
The second largest OPEC member country, Saudi Arabia, has previously made clear that it will involve itself in a deal to freeze or cut output only if its rival Iran also participates. Tehran has vehemently argued that it should be allowed to increase production to at least 4m barrels per day after years of restrictions under western sanctions. However, Saudi’s energy minister offered a more conciliatory tone this week, stating that Iran, Nigeria and Libya would not be as tightly bound by any deal to cap output. The kingdom has been assessing different scenarios relating to a co-ordinated cut to production should Iran freeze its production.
Ultimately, the success of the deal will be judged against the amount of oil taken off the market. Amrita Sen at consultancy Energy Aspects stated, “For the [oil price] rally to be sustained, however, details must be given on how the cuts will be implemented. A collective cut will not carry much weight in the market.”