01.12.2016

Oil prices jumped after OPEC deal to cut output

400An agreement between oil producer club OPEC and Russia to produce less to drain a global glut sent prices soaring in record trading volumes on Thursday, even as analysts warned other producers will likely top up supply.

On Wednesday in Vienna, the Organization of the Petroleum Exporting Countries reached a deal to reduce their oil production by 1.2 million barrels per day in order to raise global prices.

The deal also hinges on non-OPEC countries contributing an additional 600,000 barrels per day worth of cuts, with about half of that coming from Russia. On Thursday Azerbaijan said it was also willing to engage in talks on cuts.

"OPEC has agreed to an historic production cut," analysts at AB Bernstein said. "The cut of 1.2 million barrels per day (bpd) was at the upper end of expectations (0.7-1.2 million bpd). An additional cut of 0.6 million bpd from non-OPEC countries could significantly add to what has been announced by OPEC."

Global oil prices rose nearly 9 percent on today’s news, with Brent crude rising from $46 per barrel up to $51 per barrel.  The agreement depends on non-OPEC countries like Russia also agreeing to cut production. Some countries may end up cheating.

“There is a real risk that higher prices could reactivate more dormant shale oil,” said ANZ Research, which expects international oil prices to hit strong resistance at around $60 a barrel in early 2017.

Moreover, a price increase of $10 to $15 a barrel may also blunt the appetite of some oil consumers in Asia who beefed up inventories recently by buying when prices were in the $40 range, analysts say.


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