OPEC deal sends shockwaves through the markets
Yesterday was an eventful day within the oil sector. For the first time since 2008 OPEC agreed to reduce oil production to combat weak oil prices. This announcement sent prices surging, with Brent Crude up 10% at end of trading, around $52/bbl. The announcement seemed to catch the markets off guard, causing a marked push up in prices.
You can understand why this announcement has caught the markets by surprise. There are big political issues affecting most OPEC members, outside of oil. Saudi Arabia has been accused of funding ISIS whilst Iraq is in an on-going war against the same organisation. Iran has only recently had sanctions lifted against them from the West so a cut in production output is untimely for them to say the least. Relations between Saudi Arabia and Iran are also tense as they battle for influence over Yemen.
To cap it all off, non Opec member Russia has also agreed to production cuts. This is most surprising as only recently Russia stated that they were intending to increase production rather than decrease.
The fact that all of these countries have managed to put their differences to the side and come to an agreement where some members win more than others seems impressive. But this output reduction is not due to commence until January 2017. The big question is, will the deal stick?
History has shown how volatile Middle-East relationships can be and given the complicated nature of the OPEC announcement, it wouldn’t be surprising if the actual execution of this deal was to vary from the agreed proposal to some degree.
There is no doubt though that this announcement is good news for much of the oil and oilfield services industry – hoping to see prices return to profitable levels for several years. However, we have seen things change quickly in the past and there is a big difference between a deal being struck and the deal being executed to the letter. It remains to be seen how successful OPEC is in seeing this through.