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Business

Oil prices soar after OPEC's first production cut in eight years

The price of crude and energy shares have spiked, especially across Asian markets, in the wake of OPEC’s decision to reduce global oil production by 5 percent. The dollar has also benefited, rising to a nine-month high.

Energy shares led a rally across Asian markets Thursday and oil built on the previous day's near 10 percent surge after OPEC hammered out a last-minute deal to cut oil output for the first time in eight years.

At the OPEC exporters' group meeting in Vienna yesterday, the cartel's 14 members agreed to reduce production by around 4.5 percent, or 1.2 million barrels a day. Key non-member Russia also committed to a reduction, its first in 15 years.

The surge ended weeks of uncertainty and volatility on crude markets as the key players bickered over who would shoulder the biggest burden of the cuts.

"The words 'OPEC' and 'exceed expectations' have rarely, if ever, been used in the same sentence," Jeffrey Halley, senior market analyst at OANDA said. "However, yesterday's production deal seems to have done just that."

OPEC's decision has boosted the entire oil sector, lifting crude oil to $50 a barrel for the first time since October. Among energy firms, Tokyo-listed Inpex piled on 10 percent, while Woodside Petroleum soared more than six percent. CNOOC ploughed 6.1 percent higher in Hong Kong and PetroChina almost five percent.

Stock markets saw sharp rises as well, with Japan's Nikkei ending up 1.1 percent at its highest close this year, Hong Kong adding 0.4 percent and Shanghai closing up 0.7 percent.

In Europe, the Stoxx Europe 600 Oil and Gas index and the basic resources index were the big exceptions with shares falling in almost every other sector. The indices were up 1.5 percent and 2.1 percent, respectively.

The OPEC deal also benefited the dollar, which rose to a nine-month high.

Although OPEC's decision was widely praised, some analysts expect gains to be short-lived, especially if US production increases to exploit higher prices. "With a more stable supply-side situation now the norm thanks to US shale production, any further upside for the oil price from current levels is unlikely to be sustainable," Viktor Nossek, director of research at asset manager WisdomTree, told Reuters news agency. "But that does not mean there will not be a spike in volatility around the price."

This comes after oil hit near 13-year lows of below $30 a barrel in February from peaks of more than $100 in June 2014. Economists expect a further crude oil recovery to be a boon for oil-exporting economies and ease deflationary pressures in developed economies.

This Friday’s release of US job data could provide some insight into OPEC's plans for future increases over the next year.

bb/sgb (AFP, Reuters)

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