OPEC, Russia agrees cut: oil prices surge

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Deep water oil rig in Nigeria
Deep water oil rig in Nigeria

Oil prices have surged by more than 12 per cent following a deal between Organization of the Petroleum Exporting Countries (OPEC) and Russia to cut output and drain global supply glut.

However, experts warn that the prices may recede as other oil producers standby to fill the gap.

OPEC agreed on Wednesday to drop its production for the first time since 2008 after Saudi Arabia and Iran agreed to slash outputs.

The deal also included the group’s first coordinated action with non-OPEC member, Russia in 15 years.

“OPEC has agreed to an historic production cut,” analysts at AB Bernstein said.

“The cut of 1.2 million barrels per day (bpd) was at the upper end of expectations (0.7-1.2 million bpd).

An additional cut of 0.6 million bpd from non-OPEC countries could significantly add to what has been announced by OPEC.”

Following the announcements, the price for Brent crude futures LCOc1, the international benchmark for oil prices, jumped more than 12 percent from below $50 on Wednesday to $52.31 per barrel.

Meanwhile U.S. bank Morgan Stanley said, “Investor skepticism remains on individual countries’ follow-through (on the cut), which is keeping prices below year-to-date highs (of $53.73 per barrel in October) for now.”

Also, because any cut will only take effect from next year, supplies for the rest of 2016 remain ample.

“Supply in December will increase while demand is expected to decline. This makes the foundations of a strong price advance unstable, if not dangerous,” commodities brokerage Marex Spectron said.

Despite the jump in prices after the deal, they are still only at September-October levels – when plans for a cut were first announced.

Oil prices remain at less than half their mid-2014 levels, when the global glut started, and Goldman Sachs said in a note following the agreement that it expected oil prices to average just $55 per barrel in the first half of next year.

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