The organisation of the petroleum exporting countries, also known as Opec, agreed to remove 1.2m barrels a day from the market after a two-day summit in Vienna ended on 7 December, sending Brent prices upwards by as much as 6% to $63 a barrel.
North America’s West Texas intermediate also saw a boost, rising 5% to nearly $54 a barrel as well as stock prices in major oil and gas companies such as Shell [RDSA] and BP [BP], rising more than 4% and 2% respectively.
The final deal is in line with an Opec advisory board’s proposed cut of 1.3m barrels a day and is expected to help stop the emergence of a glut, which could’ve pulled oil prices back down to their former lows, as well as balance the market in 2019.
Shell [RDSA] share price increase post Opec agreement on 7 December
US bank Goldman Sachs [GS] also expects the cut to reverse the “ongoing counter-seasonally large increase in inventories” and should lead to a price correction.
In the run-up to Opec’s final meeting of the year, crude prices had been trading lower throughout the week with the Brent crude down 3% on 6 December when the group, made up of Middle Eastern, African and South American oil producers, ended the day without an agreement.
Opec has been under increasing pressure from forces that are changing the global oil network, the US being one of the biggest. Following the announcement, President Donald Trump berated the group’s deal on social media as he sees low oil prices as key to sustaining America’s economic growth.
While Saudi Arabia continues to be Opec’s biggest crude oil producer, the US became the largest producer of oil in the world in October. Barclays said in a note to clients that oil production in the state of Texas alone has grown by around 2 million barrels a day in a year to more than 11.5 million.
Oil prices enter correction territory
In early October, the international oil benchmark, Brent crude, had reached a four-year high of $83 a barrel, but fell by more than 30% to the $58 barrel mark when the supply of crude oil outstripped demand, and the global commodity sell-off ensued.
However, the decline stopped when oil prices rose solidly for the first time in two months on 3 December following Washington and Beijing’s truce agreement, Russia and Saudi Arabia’s pact and Canada’s commitment to cut oil production.
The spike came after Russia and Saudi Arabia had agreed to extend their cooperation of managing oil output to 2019 with Russia reportedly agreeing to a 200,000 barrels a day cut at the meeting.
The rally was also prompted by the US-China 90-day trade war truce, which is expected to begin on 1 January, although investors are still uncertain whether the ceasefire will lead to a deal.
Amount of barrels per day Russia agreed to cut at the Opec summit
As the fifth biggest producer of oil in the world, Canada’s announcement on 3 December that it would cut oil production by 325,000 barrels a day next year in Alberta to bolster prices also helped the rebound with the Western Canadian Select, surging 4% to nearly $53 a barrel.
As a result of the news, oil producers operating in Canada saw their share prices increase, with shares of Canadian Natural Resources [CNQ] up by more than 10%, while Athabasca Oil [ATH] shares rose more than 12% that same day.
While the breakthrough cut will help Opec’s efforts to reign in emerging oversupply, the question is now whether Trump will play ball, or attempt to further increase US oil production in order to send prices back on a downward spiral.