Oil Prices Surge After OPEC Agrees to Cut Output

OPEC reached an agreement to cut production for the first time in 8 years.

oil prices

Oil prices jumped to more than 8% after the Organization of the Petroleum Exporting Countries announced the first output cut deal since 2008.

After months of discussions, OPEC has agreed to cut 1.2 million barrels a day of world oil output to 32.5 million barrels a day starting in January.

Crude prices surged as a result. U.S. West Texas Intermediate crude futures rose $4.02 (U.S.) to $49.25 a barrel, a 8.9 per cent gain. WTI briefly traded at a high of $49.37 a barrel, a 9 per cent gain.

OPEC president Mohammed bin Saleh Al-Sada called it a “historic agreement.”

“This is a major step forward and with my colleagues we think is a historic moment to come to this agreement that will help balance the market,” he said during a news conference in Vienna.

U.S. stocks rose on Wednesday, with the Dow industrials and S&P 500 hitting their latest in a series of records, thanks to one of the best days in months for the energy sector.

Following the agreement Saudi Arabian Energy Minister Khalid al-Falih said: “It’s a good day for the oil market, it’s a good day for the oil industry. The deal is not only what we wanted, but what the market wanted.”

Reductions per country and Indonesia suspended

Saudi Arabia accepted a “big hit” on its production by reducing output to 10.06 barrels per day, a source told Reuters on Wednesday.

Member countries also agreed that Iran, which wants to build its oil exports to recover from years of sanctions, will be allowed to freeze output at pre-sanction levels of 3.797 million bdp.

OPEC watcher Amrita Sen from Energy Aspects said: “OPEC has proved to the skeptics that it is not dead. The move will speed up market rebalancing and erosion of the global oil glut.”

At the meeting, that was still ongoing after six hours of debate, they agreed that Algeria could reduce production by 4.5 percent, or about 1.2 million barrels per day.

Indonesia has suspended its membership because, as a net importer of oil, it wanted the price of crude to stay as low as possible and declined to cut output. As a result, the exact combined reduction was yet to be calculated.

Non OPEC members

OPEC president Al-Sada said non-OPEC producers had agreed to reduce output by a further 0.6 million bpd, of which Russia would contribute some 0.3 million.

Veteran OPEC watcher and founder of Pira consultancy Gary Ross said: “If you get this deal done, it would be huge. You remove a lot of oil from the market and you get the Russian participation.”

But will OPEC comply? Analysts said oil traders would watch the agreement warily in the coming weeks, as the group has an irregular history of complying with its own agreements.

OPEC will hold talks with non-OPEC producers on December 9. The organization will also have its next meeting on May 25 to monitor the deal and could extend it for six months, Al-Sada said.

Energy Stocks Up

On Wednesday energy stocks rose making up all of the S&P 500’s 18 biggest daily percentage gainers. The first one in the list was Marathon Oil Corp. (NYSE:MRO) that surged 19% to $18.14 while Newfield Exploration Co. (NYSE:NFX)  jumped 15% to $45.02. Transocean Ltd. (NYSE:RIG), surged 17% to $13.05 while Murphy Oil Corp. (NYSE:MUR), advanced 15% to $33.94.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

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