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Oil prices rise above 50-dollar mark as Opec agrees to lower production

Published 30/11/2016

The drop in oil prices meant cheaper petrol for motorists
The drop in oil prices meant cheaper petrol for motorists

Oil prices have soared after the Organisation of the Petroleum Exporting Countries (Opec) defied the naysayers to agree its first production cut since 2008.

Brent crude broke above the 50-dollar mark, soaring more than 8% - or three dollars 89 cents - to 51.21 US dollars a barrel after the landmark deal was announced in Vienna.

Despite last-minute infighting between members threatening to scupper months of negotiations, Opec president Mohammed bin Saleh Al-Sada said the cartel would reduce production by around 1.2 million barrels a day to a total production of 32.5 million barrels a day from the start of next year.

But in a surprise twist, Mr Al-Sada said the move to curb supply could only be enforced if non-Opec members slashed their output by 600,000 barrels a day.

He said Russia - a non-Opec member - had already shown its support by agreeing to cut its production by 300,000 barrels a day from an output of around 10 million barrels a day.

The fallout of the contentious talks also revealed that Indonesia had suspended its membership of the Opec cartel because it could not agree to its share of the cuts.

Mr Al -Sada said: "With the cooperation of, and understanding of, all member countries, we have been able to reach an agreement.

"This agreement comes from a sense of responsibility from Opec member countries and non-Opec member countries for the general well-being and health of the world economy."

Asked whether the deal showed that Opec was still a relevant organisation, Mr Al-Sada said: " If we weren't there, balancing the interests of members and non-members, we wouldn't have a deal today."

The agreement appeared to be a distant hope on Tuesday after it emerged that Opec's top producer, Saudi Arabia, was at loggerheads with Iran over how best to curb supply.

But despite Saudi Arabia's reluctance, it agreed to shoulder the lion's share of the production cuts, trimming its output by 486,000 barrels a day to more than 10 million barrels a day.

Iraq plans to roll out the second largest output cut, pulling production back by 210,000 barrels a day to 4.3 millions barrels a day.

Iran's production cut will take its output levels down to 3.7 million from 3.9 million barrels a day.

Brent crude prices have fallen nearly 50% since their peak of around 100 US dollars a barrel in June 2014, as Opec stayed away from production cuts so it would not lose market share to a resurgent US oil industry.

The slide in prices has delivered cheaper petrol at the pumps for motorists, but hammered the financial performance of blue-chip energy companies.

Oil majors were the biggest risers on the FTSE 100 Index at the end of Wednesday's session, driven by the rallying price of Brent crude.

Shares in Royal Dutch Shell B closed up more than 4%, while rival BP jumped 3% higher.

Bob Minter, investment strategist at Aberdeen Asset Management, said the cut was bigger than most people had expected and could push oil prices to between 56 and 60 US dollars a barrel.

He said: " People were seriously starting to question Opec's ability to react to what has been going on in the oil market and this reaffirms their ability to act as a group.

"Greatly increased demand for oil is not necessarily a given in the years to come. Trump might try to tear up the Paris Accord, but it's the likes of India and China that matter the most and they don't want to rely on oil.

"Opec is going to need to harness all of its powers of coordination and bargaining to chart this existential threat."

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