Non-OPEC members have joined their counterparts within the organisation in agreeing on a deal to cut production in an attempt to support the oil price. Brent crude futures - an international benchmark for the price of oil - have responded positively to the news, rising around 5% since last night’s open and in doing so posting a new 2016 high. The FTSE 100 is little changed on the day whilst the pound is trading slightly softer, with the buoyant oil price seeing the Canadian Dollar as the greatest beneficiary and rising by more than 2% against it.
Collaboration amongst oil producers sends oil soaring higher
The first pact in 15 years between OPEC and non-OPEC countries to reduce production has seen the oil price continue its recent rally and break higher to trade its highest level of the year this morning. The bulls have been firmly in control of the market since a deal was struck amongst OPEC members at the end of last month, and with that deal being contingent on non-OPEC countries participating in reducing output, the announcement of a 558k barrels a day reduction for non-OPEC comes near the top of the expected range and has seemingly rubber-stamped the agreement. However, before bulls get too carried away and expect a strong move higher towards $100 a barrel it is worth noting that there are little by the way of checks in place to ensure each individual country maintains their agree level of production, and the incentive to cheat on the agreement is strong. With Saudi Arabia seemingly throwing in the towel in their strategy of flooding the market with oil to suppress the price and take higher-cost producers such as US shale out the market, it now appears that all oil-producing nations would like higher prices. However from an individual perspective all countries would prefer to not have to cut their own output and therefore be able maximise their profits from higher prices and this may lead to some choosing to exceed their quota. If a country is caught exceeding its quota then others may feel let down and also choose to ramp up production and this could lead to a return of excess supply.
Oil majors the biggest gainers on the FTSE
Rather unsurprisingly the best-performing stocks on the FTSE 100 this morning come from the oil & gas sector, with Royal Dutch Shell (LON:RDSa) and BP (LON:BP) both rising due to the latest leg higher in the price of oil. What is quite unexpected is that less than 15 companies are higher on the day, which is unusual given the broader index is little changed and lower by only 8 points at the time of writing. Consumers of oil suffer when prices rise, and this can be seen in International Consolidated Airlines and easyJet (LON:EZJ) both losing ground on the day. The yield on US government debt has continued its rise since the presidential election and this has had a major negative impact on the price of non-yielding assets such as Gold. With futures on the precious metal falling to their lowest levels since early February shares that are positively correlated with the price of bullion are under pressure, with Randgold Resources (LON:RRS) and Fresnillo (LON:FRES) amongst the worst performers on the UK blue-chip index.