Oil Prices Surge Following OPEC Production Cap

Oil prices surged following news that the Organization of Petroleum Exporting Countries had agreed to cut production and cap output. The international oil benchmark Brent crude rose 6% to nearly $49 a barrel on the back of the announcement.

November West Texas Intermediate crude futures jumped 4.7%, or $2.11, to trade at $46.78 a barrel. US stocks also closed higher overall following the surge in oil prices, with the Dow Jones Industrial Average closing up 110.94 points, ExxonMobil Corp. shares jumping 4.40%. Moreover, the S&P 500 index finished up 11.44 points, or 0.5%, at 2,171.37, while the energy sector jumped 4.3%. Oil prices settled up 5.3% at $47.05 on Wednesday.

The energy ministers from the major oil exporting nations struck the deal during talks held in Algeria in order to limit crude production and reduce the oversupply. The formal details of the agreement will be finalized at the OPEC meeting in November.

The deal stipulates a 700,000 barrel reduction of oil output per day overall, though some OPEC nations will cut their production more than others. Iran, for instance, will be allowed to increase its output. Oil production will be limited to a range of 32.5 million to 33 million barrels per day, down from August’s output of 33.2 million barrels.
“Opec made an exceptional decision today,” Iran’s Oil Minister Bijan Zanganeh said, according to the BBC.

Goldman Sachs expressed skepticism that the deal would successfully limit oil production in the long term, in a note that the investment bank circulated to investors. Goldman said that it would not revise its forecasts for WTI at $43 per barrel by 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.
Goldman also noted that “compliance to quotas is historically poor, especially when oil demand is not weak,” and that other oil exporting nations not beholden to the quota had increased oil production beyond analysts’ expectations.

References:

http://www.cnbc.com/2016/09/28/goldman-sachs-opec-production-cut-deal-doesnt-change-oil-price-forecasts-through-2017.html

http://www.marketwatch.com/story/us-stocks-close-higher-as-oil-jumps-2016-09-28?siteid=bnbh

http://www.marketwatch.com/story/oil-futures-rally-on-report-of-opec-output-cap-agreement-2016-09-28?siteid=bnbh

http://www.bbc.com/news/business-37502538

http://money.cnn.com/2016/09/28/investing/oil-surges-after-opec-informal-meeting/

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