Oil prices soar after OPEC agreement to cut production
Investors had been betting on an oil price rebound ahead of the OPEC meeting last week, and they appear to have been right in doing so, as the oil price has soared after an agreement on a product cut was finally reached.
The four weeks prior to the meeting, which took place on 30 November, saw strong inflows into oil ETPs, with ETF Securities reporting $236m of new money in its products.
Investors appeared to be unperturbed by the uncertainty around whether the oil-producing nations would come to an agreement to cut oil output, despite a number of hurdles along the way suggesting the deal could fall through.
Members of the Organisation of Petroleum Exporting Countries (OPEC) made a preliminary deal to cut oil production back in September, but by November an agreement was looking less likely, with a key meeting between OPEC and non-OPEC producers called off by Saudi Arabia just days before the decision was due.
However, on 30 November OPEC members finally agreed their first deal in eight years to cut production by 1.2 million barrels a day to 32.5 million barrels.
Oil prices bounced up 8% immediately after the news emerged into the public domain, with Brent rising up past the $50 a barrel mark; it continued to rise the following day, trading at around $53 by mid-afternoon on Thursday (1 December).
The news also initially boosted the FTSE 100 index, which is full of oil majors such as BP and Shell. It closed the day at 6,784 points, but fell back by 1% the following day to trade at 6,723 by the afternoon.
Short-lived production cut?
Despite the initial euphoria in the market, commentators believe the effect of the production cut on the oil price will be short-lived, saying non-OPEC countries are likely to ramp up production to take advantage of the higher prices.
Viktor Nossek, director of research at ETF provider WisdomTree, said: “We would expect to see investors speculate whether OPEC will make further cuts, especially if [the] rally is as short-lived as we expect it to be.
“What is clear is that OPEC has not ushered in a new era of higher prices, with this meeting unlikely to lead to any major directional change for oil in the near to mid-term.”
Chris Beauchamp, chief market analyst at IG, also remains skeptical, saying the cuts takes production back to levels seen in May, and that the underlying trend in prices remains upwards. He also noted that Russia, which has hinted at a supply cut, is yet to make an official announcement on this.