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OPEC countries agree to a deal to reduce oil output

U.S. stocks turn lower in midday trading US STOCKS-Wall Street rallies as OPEC reaches output deal
Remigio Civitarese | 02 Ottobre, 2016, 05:39

Oil prices did rise quite a bit between February and June when the attacks were at their most intense, but they did not reach much beyond $50 per barrel.

Energy companies led a global stock market rally Thursday as investors welcomed news that OPEC nations planned to cut oil production for the first time in eight years in an effort to reduce a global glut.

Benchmark prices had initially extended gains made in the previous session following the decision by the Organization of the Petroleum Exporting Countries (OPEC) to reduce its aggregate output by 700,000-800,000 barrels per day (bpd), or to around 32.5 million to 33 million bpd.

The production-freeze agreement was the first of its kind since 2008, as Saudi Arabia softened its stance on regional rival Iran. Oil prices shot up by around 5 percent in the wake of the cut.

Iraq overtook Iran as the group's second-largest producer several years ago but kept its OPEC agenda fairly low-profile. An April summit in Qatar that was widely expected to product an output cut fell apart. "Saudi Arabia appears willing to bear the main brunt of the burden".

That economic pain began to undercut Saudi Arabia's oil policy, people familiar with the kingdom's strategy said.

US crude was up 1.9 percent at $47.95 a barrel and Brent last traded at $49.40, up 1.5 percent on the day. USA light crude oil was down 17 cents at US$46.88 a barrel, after first hitting US$47.47, its highest since Sept 8.

Saudi Arabia had long reasoned that vast new American oil supplies and potential carbon regulations would keep oil prices well below $100 a barrel for a long time.

Oil ministers said full details of the agreement would be finalised at a formal Opec meeting in November.

Aiming to cut costs, the Saudi government has slashed ministers' salaries by 20 percent and abolished public sector perks.

This is good news for oil producers who have borne the brunt of fall in oil prices and also for other commodity producers who have seen prices move up in tandem with that of oil. "This is not the case today with resilient demand growth".

OPEC's hope now is that it will be able to get non-OPEC members, such as Russian Federation, to get aboard its strategy to trim output. Moscow is still smarting from economic sanctions and the period of low prices, which have caused a painful recession and blown a hole in its state budget. Brent and U.S. West Texas Intermediate (WTI) retreated from their highest levels in more than two weeks as the market began to focus on the lack of hard facts about the deal.

As a result, analysts don't expect three-digit oil prices anytime soon. A sharp hike in oil prices would only send the current account deficit surging back, especially because growth of oil consumption in the economy has risen sharply in recent years to a nearly touch double-digit levels, and not only lead to a greater instability of the rupee and even a sharp depreciation which can only raise costs and hurt the competitiveness of the economy. "If shale gas producers boost production than the whole game will fail", he said.

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