Investors piled into oil futures and related stocks yesterday evening after Opec defied expectations and revealed a deal to cut production by 1.2m barrels a day.
Brent and West Texas Intermediate (WTI) crude prices soared as the Saudi Arabia-led cartel announced its first agreement since 2008. The Organisation of the Petroleum Exporting Countries will reduce output to 32.5m barrels a day.
However, the deal is contingent on non-Opec producers slashing their own output by 600,000 barrels per day. Russia has reportedly already committed to cutting its own supply by 300,000 barrels.
The cut represents an agreement at the lower end of the range previously agreed by Opec in September. Nonetheless, Brent crude futures for January delivery rose $3.98 to $50.36 a barrel – a jump of 8.6 per cent. WTI crude futures for January delivery rose $4.34 to $49.57 a barrel, up 9.6 per cent.
In London, shares in BP and Shell climbed four per cent earlier in the day, on hope of a deal, while across the pond some shares in US producers were up 10 per cent last night.
The S&P 500 energy index rallied 5.1 per cent, while bond yields rose.
Opec will hold talks with non-Opec producers on 9 December. The group will also have its next meeting on 25 May 2017 to monitor the progress of the deal, though City analysts warned of a series of hurdles ahead.
“Disagreements persist among Opec members on how to measure production, so the deal will be hard to police,” said Spencer Welch, director at IHS Energy.
The agreement by the cartel – whose ability to regulate the global oil market had been in doubt since it failed to agree a production ceiling at a meeting in the summer of 2014 – was hailed as a return to control.
“People were seriously starting to question Opec’s ability to react,” said Aberdeen Asset Management strategist Bob Minter.
Saudi Arabia, Opec’s biggest producer, will cut production by around 486,000 barrels per day. Opec’s second largest producer, Iraq, had previously resisted cuts, providing a hurdle to any agreement. But yesterday it agreed to reduce output by 200,000 barrels to 4.351m barrels per day.
In a historic move, Saudi rival Iran was allowed to increase production slightly from its October level, as it seeks to regain market share lost during years of US-imposed sanctions. Meanwhile, Indonesia’s membership of Opec was suspended since the country, a net importer of oil, could not cut output.
Some analysts believe global prices could drop back down, especially if US producers take advantage of Opec’s cuts by increasing production.
Opec's conference president Dr Mohammed Bin Saleh Al-Sada announced that Russia would cut its production by 300,000 barrels per day.
Saudi Arabia, by far Opec's biggest producer, will cut production by around 486,000 barrels per day.
"This is a major step forward and we think it is a historic moment to come to this agreement which will definitely help in rebalancing the market," he said.
The cut represents an agreement at the lower end of the range previously agreed by Opec in September.
More precise details of the share of cuts between the member nations have yet to emerge.
Oil prices have soared after suffering heavy losses yesterday when an agreement by Opec seemed to be falling through.
The talks in Vienna were focused on whether to uphold a tentative plan agreed in September in Algeria. Opec had announced a limit of between 32.5m and 33.0m barrels per day, a target they managed to hit.
Expectations of a cut, which would drive up prices, rose after tough rhetoric from the Iranian oil minister prompted steep falls of over four per cent at points on Tuesday.
Sentiment has swung wildly over the last month, with WTI prices falling to below $43.5 per barrel in the middle of the month, before rising above $48 per barrel last week.
Opec is a cartel which attempts to control prices for the benefit of its members. However, it had not previously agreed to a supply cut since demand crashed in 2008 when the financial crisis hit economies around the world.