After Tuesday’s loggerheads between Saudi Arabia on the one side and Iran and Iraq on the other, markets were beginning to suspect that Monday’s pre-negotiation headway was all for nought. Both the price of Brent crude and the West Texas Intermediate crude dipped by 2.9% and 3.9% to $46.38 and $45.23, respectively during the standoff.
With OPEC’s confirmation that cartel members will cut output by around 1.2 million barrels per day, reducing the total production by 32.5 million barrels per day, both indices have skyrocketed. Brent crude surpassed the $50 mark, up 7.9% in a day. The price of WTI crude per barrel rose 8% to $48.86.
Saudi Arabia will be bearing the brunt of the production cuts, which will extend for six months, according to the agreement, reducing output to 10.06 million barrels per day. In exchange for Saudi’s ‘big hit,’ its arch rival and second biggest producer Iran agreed to halt output at 3.797 million barrels a day.
Russia even reluctantly consented to cut production by approximately 300,000 barrels a day.
While the agreement is far from perfect, Cavendish Asset Management’s Paul Mumford suspects it will do wonders for lifting oil prices.
“I think the fact that OPEC and Russia have come up with an agreement is pretty positive,” Mumford said. “It also means the murmurs that come out of these countries might have a positive effect on the oil price because people will be more likely to believe it now that an agreement has been reached. People will cheat, of course, and maybe production levels won’t be quite as predicted. Nevertheless, this means companies can plan further ahead than they have could in the past.”
“Long-term I would envisage oil prices would move higher because of the supply and demand situation,” he continued. “Oil is a commodity that does run out so demand should increase despite all the electric cars coming out in market. If the OPEC agreement holds, the producers can all speak with one voice and then they can have more influence in market. Either you’ll get the oil price moving higher because of the OPEC agreement or from the supply and demand issues.”
The agreement is also positive news for the oil and gas sector as a whole, according to Mumford.
“Large companies have dwindling reserves which do need to be replaced so some of the programs that were put on ice could actually be able to restart. Meanwhile, other firms have been able to reduce their costs during this phase of depressed prices and margins are a lot better than when the oil price fell back initially.”
"The agreement could easily help with lot of companies that have overextended in the past, with a huge balance sheet debt which has been hard to service. And a higher oil price would allow companies to raise capital if they needed to do so and pay down some of that debt."