Oil prices rise further after Opec agrees output cut

December 1, 2016 12:49 pm Published by

Oil prices rise further after Opec agrees output cut

  • 1 December 2016
  • From the section Business

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Image caption

Saudi Arabia agreed to cut output by about 500,000 barrels per day

Oil prices have risen further following Wednesday’s agreement by the Opec group of oil producing nations to cut output.

The price of Brent crude rose 1.3% to $52.51 a barrel, after soaring 8.8% on Wednesday.

The deal, Opec’s first output cut for eight years, is designed to reverse a slump in global oil prices and will see the group reduce production by 1.2 million barrels a day from January.

But analysts have raised doubts about its chances of succeeding.

“Compliance is key and it’s worth noting that Opec members don’t have the best record on that front,” said Neil Wilson of ETX Capital.

The price of US crude has also risen, trading 1.1% higher at $49.99 a barrel after jumping 9% on Wednesday.

“Opec has delivered an agreement,” said Jason Gammel of US investment bank Jefferies. “For the time being, oil prices have received a huge support.”

The output cut follows several years of depressed oil prices due to a supply glut on the market, which has seen prices more than halve since 2014.

What and who is Opec?

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Getty Images

Image caption

Saudi Arabia’s energy minister, Khalid al-Falih, arriving at yesterday’s Opec meeting in Vienna

  • Formed in 1960, the Organization of the Petroleum Exporting Countries (Opec) coordinates the energy policies of member countries, who produce about a third of the world’s oil
  • It says its goal is to ensure the stabilisation of oil markets, “in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry”.
  • Its members include Algeria, Angola, Ecuador, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE and Venezuela. Indonesia agreed to suspend its membership on Wednesday.
  • A number of other major oil-producing nations such as the US and Russia are not Opec members.

The agreement rests heavily on Saudi Arabia – the world’s biggest oil producer – which has agreed to slash about 4.5% of its output, or 500,000 barrels per day.

But non-Opec countries are also party to the deal and will be expected to reduce production by a further 600,000 barrels a day.

So far Russia has pledged to cut 300,000 barrels from its output of more than 10 million barrels a day, but it is unclear who else will also scale back.

‘Scepticism remains’

Despite the rises, analysts noted that prices had only returned to levels seen in September and October – when plans for a cut were first announced – and raised doubts about the deal.

“Scepticism remains on individual countries’ follow-through, which is keeping prices below year-to-date highs (of $53.73 per barrel in October) for now,” Morgan Stanley analysts said.

Mr Wilson said oil-producing countries that were not party to the deal, such as the US, were likely to increase production as prices rose, offsetting efforts to curb oversupply.

“Russia says it will cut 300,000 barrels per day… but we don’t know where the other 300,000 barrels a day from other non-Opec members is going to come from,” he added.

“Opec has suggested the deal is contingent on getting this cut… we don’t yet know if [the deal] could unravel if this doesn’t happen.”

Opec said it would hold talks with non-Opec producers on 9 December, and hold another meeting in May 2017 to monitor the deal’s progress.

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This post was written by FSB News