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Global stock markets rally as OPEC agrees to slash oil production for first time since 2008
September 29, 2016, 5:59 pm
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The Organisation of the Petroleum Exporting Countries (OPEC) has struck a deal to cut production for the first time in eight years, sending crude prices surging.

In a decision led by a rapprochement between Saudi Arabia and Iran, who had repeatedly clashed during previous meetings, OPEC ministers decided to cut production by 750,000 barrels a day, down to 32.5 million barrels. This compares to the current output estimated at 33.2 million barrels per day.

Brent crude, the international benchmark for oil, rose almost 6 per cent to nearly $49 a barrel on the news. On Thursday morning Brent Crude was worth $48.76 per barrel, up from 45.70 on Wednesday.

Stocks markets in Asia rallied overnight on the back of the surprise deal, with European indices expected to rise by around 1 percent on Thursday. Shares in major oil producers have also jumped at the start of trading in London.

Royal Dutch Shell shares were up 5 percent, while BP gained 4.3 percent. Mining groups Anglo American and BHP Billiton were also in the top risers, gaining almost 5 per cent.

OPEC ministers will meet again on November 30 to agree on production levels for each member country. The decision was a surprise for analysts who did not get their hopes up ahead of the event. They argued that political tensions and long-run strategic market interests could once again keep the cartel from agreeing.

"This is the first OPEC deal in eight years! The cartel proved that it still matters even in the age of shale! This is the end of the ‘production war' and OPEC claims victory," said Phil Flynn, senior energy analyst at Price Futures Group. But other analysts were more sceptical.

In a note to investors on Thursday, Goldman Sachs said that it was sticking with its forecasts for WTI crude at $43 a barrel for the end of this year and $53 a barrel in 2017.

"If this proposed cut is strictly enforced and supports prices, we would expect it to prove self-defeating medium term with a large drilling response around the world," Goldman's analysts said.

Jeff Quigley, director of energy markets at Houston-based Stratas Advisors, said the market had yet to discover who would produce what: "I want to hear from the mouth of the Iranian oil minister that he’s not going to go back to pre-sanction levels. For the Saudis, it just goes against the conventional wisdom of what they’ve been saying."

The decision, to the degree it actually takes hold, will be a welcome relief to the OPEC member countries, which have all suffered from a fiscal crises because of plummeting oil prices.

The fall in oil prices in the last 18 months has been spectacular, diving from $115 (£80) a barrel in the summer of 2014 to around $28 now. The extraordinary decline has come about because of  rising supply and falling demand, as the revolution in US fracking massively increases global production just as the juggernaut economies of China and Brazil run out of steam.

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