Oil benchmarks skyrocketed yesterday evening after news broke from Algeria that OPEC had reached a deal to cut production in an attempt to support the price. The first such deal since 2008 saw Brent futures rally as much as 6% in the hours following the announcement and move up to their highest level in more than two weeks.
Agreement in Algeria
Iranian Oil Minister Bijan Zanganeh has said that the consensus reached Wednesday evening has come after two and a half years of an oil price slump that has been predominantly caused by a supply glut. Expectations of some collaboration to support the price have risen this year, with many market participants expecting a deal to be struck in Doha earlier this year. Following the failure to reach a deal in Doha, an agreement in Algeria was somewhat unexpected with Iran cited as the main stumbling block. The Tehran have been reluctant to freeze or cut production alongside other members of the cartel, as production remains below pre-sanction levels. Since the sanctions imposed on the country in an attempt to curb its nuclear aspirations have been lifted, oil production has been ramped up, but is still below a level that Mr. Zanganeh deems acceptable. Saudi Arabia is by far and away the biggest producer and therefore most powerful member of OPEC, and it appears that a softening on their stance on Iran - with the Kingdom previously insisting that Iran would have to cut or freeze production before they themselves would do likewise - was the main reason that a deal could be reached.
Oil majors soar
The best performing stocks on the FTSE100 this morning come from the Oil sector, with Royal Dutch Shell (LON:RDSa) and BP (LON:BP) surging higher following the OPEC news. With the organisation announcing a cut of up to 700,000 barrels a day this could prove a game-changing moment in the oil market with the organisation previously willing to let prices fall without curbing supply. Whilst the finer details of the deal will be hammered out at the next meeting in November, a production cut went above and beyond market expectations and appears to show a change in the strategy going forward. Stocks sensitive to the price of oil have rallied this morning, with the index as a whole gaining 74 points to trade back above the 6900 level. Amongst the positive sentiment and substantial gains spare a thought for Capita shareholders, with the stock plummeting by more than 25% after a profit warning was issued. The outsourcing firm has said that profits would be hit by one-off costs of up to £25m after it was late to implement new IT systems for the congestion charge in London.