SINGAPORE”•Oil prices resumed their rise Thursday and held above the $50 barrier following Opec’s decision to carry out its first output cut in eight years.
The Organization of Petroleum Exporting Countries at a meeting in Vienna on Wednesday agreed on specific targets to enact a preliminary deal struck in September designed to ease a global crude supply glut and boost prices.
Many analysts had expected the producers’ cartel to fail to reach a deal as major players like Iran, Iraq and Saudi Arabia remained divided ahead of the meeting.
Crude futures prices surged more than 10 percent immediately after the Opec deal.
At 0630 GMT Thursday, after a brief dip in early Asian trade, US benchmark West Texas Intermediate for January delivery was up 70 cents or 1.42 percent at $50.14, while Brent crude for February was 81 cents or 1.6 percent higher at $52.65.
“Not only had hopes of higher prices been realized, the reputation of the Opec has also been salvaged, prompting the surge,” said Jingyi Pan, market strategist at IG in Singapore.
“Skeptics have now placed their focus on the implementation of the Opec deal where Saudi Arabia will be shouldering the bulk of the cut.”
The 14-member Opec agreed to lower its monthly output by 1.2 million barrels per day (bpd) to 32.5 million bpd from January 1.
Qatar’s Energy Minister Mohammed Bin Saleh Al-Sada said non-member Russia committed to reducing its output by 300,000 bpd, half of a hoped-for 600,000 bpd reduction from outside the organization.
Prices had fallen to near 13-year lows of below $30 a barrel in February from peaks of more than $100 in June 2014 largely due to an oversupplied market outpacing demand.
Oil has whipsawed since a production-cut was first proposed in Algiers in September and investors speculated about whether an accord could be struck. The deal, designed to drain record global oil inventories, overcame disagreements between the group’s three largest producers”•Saudi Arabia, Iran and Iraq”•and ended a flirtation with free markets that started in 2014.
“The market will no longer see a sudden plunge in oil prices,” Seo Sang-young, a market strategist at Kiwoom Securities Co., said by phone from Seoul. “The biggest winners from the agreement are US shale producers, who will expand production as prices rally.”
Saudi Arabia, which raised oil production to a record this year, will reduce output by 486,000 barrels a day to 10.058 million a day, an Opedc document shows. Iraq, the group’s second-largest producer, agreed to cut by 210,000 barrels a day from October levels. The country had previously pushed for special consideration, citing the urgency of its offensive against Islamic State.
The accord comes into effect at the start of 2017 and will last six months. The pact also calls for an additional 600,000 barrels a day reduction from non-Opec suppliers. Non-member Russia will cut by as much as 300,000 barrels a day “conditional on its technical abilities,” Energy Minister Alexander Novak said in Moscow.
Goldman Sachs forecasts a further upside in WTI crude to $55 and $56.50 for Brent, and the market may shift to a deficit in the first half next year, analysts including Damien Courvalin wrote in a report.