Everything you need to know about Opec's output cut agreement

Jessica Morris
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Oil prices initially rallied more than five per cent (Source: Getty)

Markets swung wildly this morning after Opec provisionally agreed to cut oil output for the first time since 2008, as it tries to accelerate the stricken market's recovery.

What the agreement entails

The Organisation of the Petroleum Exporting Countries (Opec) said yesterday that it would cut output to a range of 32.5-33m barrels per day.

But how much each country will cut production will be decided at the next formal Opec meeting in November, when an invitation to join could also be extended to non-Opec producers such as Russia.

Why it came as a surprise

It surprised traders, analysts and market commentators because previous attempts to thrash out a freeze agreement had collapsed due to tension between regional rivals Saudi Arabia and Iran.

The pair had played down expectations for an agreement ahead of the meeting which took place on the sidelines of a three-day oil conference in Algiers.

What the markets did

The two major oil benchmarks initially jumped more than five per cent on yesterday's announcement, with traders saying they were impressed that the politically divided Opec had managed to reach a compromise.

But oil prices retreated this morning as markets grew sceptical of the deal and wondered how the oil cartel would implement the output cut.

Read more: Getting an Opec output cut won’t be a piece of cake

Brent crude, the global benchmark, fell 0.49 per cent to $48.45 per barrel this morning. Its US counterpart, West Texas Intermediate, slumped 0.23 per cent to $46.94.

Royal Dutch Shell was last up 5.75 per cent to 2,004.25p per share, while BP added 4.47 per cent 451.52p.

The momentum in energy stocks helped the FTSE 100 charge pass the psychologically important 6,900 mark in early morning trading.

What the analysts said

Analysts at investment Barclays said that the agreement "still matters and bears a resemblance to the late 1990s". During this period oil fell below $10 per barrel, however it later recovered to touch highs of nearly $150.

"It matters because it signifies that despite the Saudi/Iranian geopolitical tension, oil policy was able to remain separate from the broader political issues, for now at least," they wrote in a note to clients.

The experience has uncanny similarities to the Saudi/Venezuela agreement of the late 1990s. In that case, Venezuela, like Saudi Arabia and Iran, was trying to attract investment.

"Also, the Iranian minister in charge then was none other than the current Iranian oil minister, Bijan Zanganeh.

"Opec may have been in hibernation for the past two years, but it is certainly not dead, nor should one assume that it cannot exert influence over a market, especially one where positioning has moved to extremes."

Read more: With no new material, Opec can still move the market

Nitesh Shah, a commodities strategist at ETF Securities, warned that the group was yet to decide which members would be cutting output and by how much.

While the group traditionally (pre-November 2014) had an aggregate target, it had never made individual country targets.

"Historically, Saudi Arabia was willing to take the burden of supply cuts. But with Iran trying to pump oil at a break-neck pace, Saudi Arabia is less willing to assume this role

"Any deal made in November is likely to hinge on the burden being shared across most members (although countries suffering from outages such as Venezuela and Nigeria may be exempt)."

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