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Oil price and stock markets rise as Opec cuts crude output Oil price and stock markets rise as Opec cuts crude output
(about 5 hours later)
Oil and share prices have risen after Opec members struck a deal to limit crude output for the first time since 2008, in an attempt to ease a global glut that has halved crude prices in the past two years. Oil and share prices rose after Opec members struck a deal to limit crude output for the first time since 2008, in an attempt to ease a global glut that has more than halved crude prices in the past two years.
The group of leading oil producing countries agreed to limit production to between 32.5m and 33m barrels per day. It is a small reduction of the current output of 33.24m bpd and was agreed at informal talks at an industry event in Algiers on Wednesday. The group of leading oil-producing countries agreed to limit production to between 32.5m and 33m barrels per day. It is a small reduction of the current output of 33.24m bpd and was agreed at informal talks at an industry event in Algiers on Wednesday.
“We have decided to decrease production by around 700,000 bpd,” Iran’s oil minister, Bijan Zanganeh, told Reuters.“We have decided to decrease production by around 700,000 bpd,” Iran’s oil minister, Bijan Zanganeh, told Reuters.
Brent crude initially rose to just over $49 a barrel on Thursday morning, the benchmark’s highest price for more than two weeks, before falling to about $48.30. The FTSE 100 rose more than 1% to 6,923, the index’s highest point since mid-August, with oil and commodities companies leading the charge. Brent crude rose 2% on Thursday to just over $49.64 a barrel and has gained almost 8% since the agreement was announced on Wednesday evening. The dollar rose to an eight-day high against the yen as traders became less risk averse and the FTSE 100 index rose 1% to a six-week high of 6,919 with oil and commodities companies leading the charge.
Royal Dutch Shell, Britain’s largest oil company, was the biggest gainer in the sector, rising more than 5%, followed by BP, up 4%. Glencore, the commodities trader, the British Gas owner, Centrica, and mining shares also rose strongly as Opec’s move supported the prices of other commodities. Royal Dutch Shell, Britain’s largest oil company, was the biggest gainer in the sector, rising more than 6%, and BP rose 4.4%. British Gas owner Centrica, Glencore, the commodities trader, and mining shares also rose strongly as Opec’s move supported the prices of other commodities.
Michael Burns, an oil and gas partner at Ashurt law firm, said: “This could well be a significant turning point. Though the detail is to be worked through, the support from Opec will likely give more confidence to investors on medium to long term prices, something that has been very much lacking over the last two years.” Michael Burns, an oil and gas partner at Ashurst law firm, said: “This could well be a significant turning point. Though the detail is to be worked through, the support from Opec will likely give more confidence to investors on medium to long-term prices, something that has been very much lacking over the last two years.”
Opec, whose leading members are Saudi Arabia, Iran and Iraq, will agree individual production targets for each country at its meeting on 30 November in Vienna. Opec, whose leading members are Saudi Arabia, Iran and Iraq, will try to agree individual production targets for each country at its meeting on 30 November in Vienna.
The agreement to limit production after several failed attempts appears to be a reversal of policy for Saudi Arabia, the world’s biggest oil producer, which had sworn to maintain output despite the price of crude plunging from more than $100 a barrel in summer 2014. But analysts warned this would be hard to do because Opec’s members are divided about output levels. Iran has remained unwilling to reduce production, which remains below peak capacity as it recovers from US sanctions lifted in January. Libya and Nigeria are also seeking to increase production after years of disruption caused by internal conflict.
Oil has fallen due to a global glut caused by shale production in the US and oversupply from countries such as Brazil, combined with a slowing global economy and lower growth in demand from China. The agreement to limit production after several failed attempts is a reversal of policy for Saudi Arabia, the world’s biggest oil producer, which had sworn to maintain output in the hope that low oil prices would force US shale producers out of business.
Saudi Arabia kept pumping oil in the hope low prices would put smaller producers out of business, protecting its share of the market by removing competition. The resistance of the Saudis and Iran to output cuts caused divisions in Opec as low prices inflicted pain on member states’ economies. Oil has fallen from $105 a barrel in summer 2014 due to a global glut caused by shale production in the US and oversupply from countries such as Brazil, combined with a slowing global economy and lower growth in demand from China.
More recently, Saudi Arabia’s resolve has weakened as the prolonged low oil price has forced it to cut public spending to protect its financial reserves. Dougie Youngson, an analyst at the stockbroker Finncap, said Saudi Arabia has realised its strategy is not working but that it does not want to be the “swing producer” that cuts output while others carry on as before. He said that although some US shale producers had gone bust, those that remain have become more efficient.
However, Iran has remained unwilling to reduce production, which remains below peak capacity as it recovers from US sanctions lifted this year. “There is a lot of work that has to be done and the agreement could fall apart quite quickly. US shale is not going to go away and arguably Opec has made things worse because the companies that have survived are better placed for when the oil price goes up.”
Jason Gammel, an oil and gas analyst at the stockbroker Jefferies, said Saudi Arabia was likely to reduce output, with Iran allowed to increase production. He said Opec’s announcement could be an attempt to push up prices without reducing supply – but this could ease pressure on rival producers before a likely meeting of supply and demand this year. The resistance of the Saudis and Iran to output cuts caused divisions in Opec as low prices inflicted pain on member states’ economies. Saudi Arabia’s resolve has weakened as the prolonged low oil price has forced it to cut public spending to protect its financial reserves.
Jason Gammel, an analyst at the stockbroker Jefferies, said Opec’s announcement could be an attempt to push up prices without reducing supply – but this could ease pressure on rival producers before a likely meeting of supply and demand this year.
“We remain sceptical about any effect in the physical crude market … The risk of abandoning the market share strategy before the market achieves balance is that a higher price could allow new supply from higher up the cost curve to reach the market.”“We remain sceptical about any effect in the physical crude market … The risk of abandoning the market share strategy before the market achieves balance is that a higher price could allow new supply from higher up the cost curve to reach the market.”
Negotiations are further complicated by the position of Russia, which is relying on oil production to support its ailing economy. Opec has invited representatives from Russia to attend its meeting in November.