OPEC has decided to reduce output by 1.2 million barrels a day to 32.5 mb/d.
We believe the OPEC agreement today is important. It’s the first agreed cut since the financial crisis, and the formalisation of a change in OPEC policy indicated at the Algiers Producers’ meeting two months ago.
OPEC has decided to reduce output by 1.2 million barrels a day to 32.5 mb/d. The breakthrough deal, effective January, showed an acceptance by Saudi Arabia that Iran, as a special case, can still rise its production to about 3.8 mb/d. Saudi Arabia will reduce its production by 486000 b/d to 10.058 my/d. The agreement also calls for a reduction of about 600000 b/d by non-OPEC countries
The market reaction
Crude prices rose 8,8% in London. The Brent traded at 50.4$/barrel in New-York at the end of the day.
The currencies of oil producing countries rose on the news. Colombia’s peso and Russia’s ruble were the best emerging-market performers, while Norway’s krone climbed as other Group-of-10 currencies fell.
The Stoxx Europe 600 and the S&P 500 were moderately positive on the day. Government bond yields rose but without going back to last week highs.
The OPEC decision, if all parties deliver on their commitments should bring the supply and demand back to equilibrium early in 2017. For this reason we move our fair value range for 2017 to 50-60$/barrel from 45-55$. We still believe that crude prices should not rise much above 60$/barrel because from that level US shale oil producers are profitable and will be keen to increase their production.
The lesson from early 2016 is that very low oil prices are bad for the stock markets. Not only because they are affecting the earnings of oil companies but also the investments cuts of the sector were impacting the heavy industry which is one of its biggest supplier. Very low oil prices were also affecting the producing countries to a point that they had to reduce strongly their imports from the rest of the world.
All in all, a barrel around 55$ should affect moderately the consumer purchasing power (the barrel is still at half of the price from mid 2014) but is good for oil majors earnings and for the industry in general.