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Surprise OPEC deal sends oil price soaring

Iran, Saudi Arabia, and the rest of the OPEC countries have, against expectations, agreed to produce less oil. The oil price has soared big-time after news of the agreement, while Asian energy companies have seen their share prices rise on the stock exchange.

Photo: Kamran Jebreili / AP Polfoto

The offshore and energy companies have for months been hankering for good news regarding the oil price, which has declined steadily over the last two years and which, in the beginning of the year, was hovering down at USD 28 per barrell.

The low oil price has led to a loss of jobs in the supply chain, the oil companies, and at the offshore supply carriers. Numerous companies have merged and suppliers have lost contracts overnight, while companies have been forced into restructuring processes, of which the latest example came last week with the Maersk Group's split into two divisions, Transport & Logistics and Energy.

But the good news are now here, as the organization of petroleum exporting countries, OPEC, on Wednesday agreed to cut their oil production in a deal which defied analyst and market expectations and immediately made the oil price soar.

The low oil price came under renewed pressure last year when Iran returned to the world market as en oil exporter. This intensified existing overcapacity which was created not least by US shale oil, which has pushed Saudi Arabia to call for a reduced combined oil export.

The cut is clearly bullish. What’s much more important is that the Saudis appear to be returning to a period of market management"

Oil analyst Mike Wittner of Societe Generale

On Wednesday, OPEC, which consists of 12 oil exporting nations - including arch enemies Iran and Saudi Arabia - finally agreed to produce only 32.5 million barrels of oil per day, which is 0.8 million less than the countries' output in August.

"The cut is clearly bullish. What’s much more important is that the Saudis appear to be returning to a period of market management," says oil analyst Mike Wittner of Societe Generale SA in New York to Bloomberg News.

North Sea oil price increased

News of the agreement sent oil prices soaring. The price of a barrel of WTI oil increased 4.8 percent to USD 46.8. WTI is used as the price reference oil in the US. The price for a barrel of brent, the North Sea reference oil, increased 5.3 percent to USD 48.4.

According to Reuters, the deal enables Iran, Nigeria, and Liberia to produce as much oil as they can. Specific limits for how much oil each country is allowed to produce will be set at a later date.

"This will result in rising prices, and that will definitely help US-based producers. We project an increased US output as well as a rising export aimed at filling the supply gap left by OPEC," energy market analyst Sarp Ozkan of Ponderosa Advisors tells Reuters.

The price per barrel of oil has plunged from slightly above USD 100 dollars in 2014 to around USD 40 today.

Optimism on the Asian stock markets

Asian stock market investors welcome OPEC's decision to reduce the oil output, and energy share trading on Thursday is characterized by rising share prices.

"The energy sector is going to be a key contributor to the rally we see after the OPEC decision. All we’ve seen at this stage is the intention to do something. I’d like to see it more concrete and then still they have to abide by it. But, it is the first step," notes strategist Tony Farnham, Patersons Securities Ltd., according to Bloomberg.

In Tokyo, major energy producers take the lead. Inpex Corp, Japan's largest oil and gas exploration group, increased 6.5 percent, while Japan Petroleum Exploration noted a 9.8 percent increase.

"OPEC’s decision to curtail production wasn't expected, and now crude prices will likely head toward a range of USD 50 to USD 60 per barrel from USD 40 to USD 50 per barrel, which will ease global deflationary concerns," Nobuyuki Fujimoto of SBI Securities Co. in Tokyo tells Bloomberg News.

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