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Published: Fri, October 07, 2016
Economy | By Melissa Porter

OPEC agrees to cut production; oil prices surge

OPEC agrees to cut production; oil prices surge

Oil prices dropped on Friday on profit-taking, after rising 7 percent in the past two sessions, amid doubts that OPEC's first planned output cut in eight years would make a substantial dent in the global crude glut.

Analysts at Macquarie advised oil investors to sell into the rally because they believe any OPEC agreement will marginally change the group's oil output from 33.2 million barrels per day produced to 33.0 million barrels per day.

The two countries have been at loggerheads over oil production for the past two years and are locked in a tense geopolitical rivalry, with Riyadh and Tehren supporting opposing sides in the civil wars raging in Yemen and Syria.

On the New York Mercantile Exchange, a barrel of West Texas Intermediate for November delivery gained 41 USA cents to close at US$48.24.

USA bank Goldman Sachs expects the OPEC deal to add $7-$10 to oil prices in the first half of 2017.

Oil prices settled up almost 6 percent on Wednesday in the USA after news of the deal, then continued to rise early in Asian trade before those gains pared.

A drop in US crude stocks for the fourth straight week also supported oil prices.

Iran's Minister of Petroleum Bijan Zangeneh said on Thursday the agreement demonstrates that the organization is still "alive".

Under the agreement, OPEC oil production is expected to be reduced to a range of 32.5 to 33 million barrels of oil per day from 33.4 million. There's no guarantee every country will agree on a final plan - and as Katzenberg points out, even when they do agree, OPEC nations don't always actually abide by the production limits.

On Wednesday, the November crude oil contract gained $2.38 to settle at $47.05 a barrel.

The details, including the quotas for each member and the implementation data, will be finalised at Opec's policy meeting in November.

Despite the low oil price environment, Russian Federation averaged 10.71 million bpd of crude in August, and according to Bloomberg data, is on track to average 11.1 million barrels per day in September. The announcement Wednesday lit a fire temporarily under oil prices, sending petroleum-linked shares surging on Wall Street and later across Asian and European stock markets. A more definitive policy, including production caps for individual members, will be discussed and possibly ratified at OPEC's next meeting on November 30 in Vienna.

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