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Oil surges 6% on OPEC agreement, but analysts skeptical of sustained rally

Oil prices jumped as much as six per cent on Wednesday after OPEC sources told Reuters the group has reached a deal to limit crude output.

Cartel lays groundwork to reduce output by 740,000 barrels a day from current level

Suhail Mohamed al-Mazrouei, energy minister for the United Arab Emirates, attends the opening session of the 15th International Energy Forum ministerial meeting in Algiers, Algeria, Tuesday. (Sidali Djarboub/Associated Press)

Oil prices surged as much as six per cent Wednesday on news that OPEC had reached an agreement to limit production, but analysts remained cautious about the prospect of a sustained rally.

"I think it's a big surprise to everybody," said Martin King, vice-president of institutional research with Calgary-based FirstEnergy Capital.

"I don't think anybody in the market really expected there to be any kind of an agreement, as informal as it is, to really come out of that meeting in Algiers."

Citing two sources within the Organization of the Petroleum Exporting Countries, Reuters reported Wednesday the cartel has agreed to limit production to 32.5 million barrels per day, after talks held by the group on the sidelines of the Sept. 26-28 International Energy Forum in Algiers, Algeria.

The latest production figure for the group is 33.24 million barrels per day.

How much each member country will produce is to be decided at the next formal meeting of OPEC in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia, the sources said.

The news saw Brent crude rise as much as $2.76, or six per cent, to $48.73 a barrel by 2:28 p.m. ET.

West Texas Intermediate (WTI) crude rose by $2.35, or 5.4 per cent, to $47.02, peaking at $47.45, its highest since Sept 8.

But noting the agreement's lack of firm details, King cautioned against any expectations of an even bigger jump in the price of oil.

"We'll probably hang around the mid-40s, maybe upper-40s for West Texas prices, but that's probably realistically where they should be, with or without a deal," he said.

"And if they can pull of something more concrete in November, then maybe we'll see some more price appreciation then."

'A lot of time for skepticism to build'

King said he was "50/50" on the chances of the agreement leading to an actual cut in OPEC production, which would be the first since 2008.

"There's a lot of details that have to be worked out between now then, such as individual country quotas, whose data sets they're going to use — they can't even necessarily agree on whose data they're using for production, sometimes — who's going to face production limits and who's not," he said.

"If they do pull of some kind of agreement at their Nov. 30 meeting, it may not even go into effect until Jan. 1, so we're looking at many months down the road and that's a lot of time for skepticism to build in the marketplace."

Supply stability

The move is encouraging, said Terry Abel, executive vice-president with the Canadian Association of Petroleum Producers.

"It has the potential to bring some stability to the supply side and for us in Canada, I think that presents an opportunity to compete globally for that supply," he said.

It's far too early to speculate on whether it could kick-start energy projects in Alberta, said Abel, but he doesn't expect things to change too much, in the short term, in the province's energy sector.

"We're producing pretty much the same amount of oil that we did before. We're not seeing growth. We're seeing slower growth. And the ability for growth to return to some different levels, or an increase, is going to be dependent on accessing markets."

Michael Wittner, global head of oil research at Société Générale in New York, said the deal could "potentially be very significant" not so much for the number of barrels it could take out of production, but because it signals Saudi Arabia is considering a return to active supply management.

"It remains to be seen how many real barrels will be removed from the market," he said.

"To me, the significance is way beyond that — they all sat down in a room and made a decision."

Saudi Arabia needs to see oil prices rise, said Tim Marchant, who teaches strategy and energy geopolitics at the University of Calgary's Haskayne School of Business. 

The oil superpower recently borrowed money from the international bond market and announced big cuts to civil servant wages. The country has also talked about privatizing its state-owned oil company.  

"I am not wildly optimistic, but I think it's hopeful that we are seeing a change, and we're seeing a change because of that pressure in Saudi Arabia."

University of Calgary's Tim Marchant on why Saudi Arabi needs to see oil prices rise and what it means for Alberta. 3:51

Saudi Arabia strategy shift

Saudi Energy Minister Khalid al-Falih said on Tuesday that Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense" as part of any output limits, which could be set as early as the next OPEC meeting in November.

That represents a strategy shift for Riyadh, which has said it would reduce output to ease a global glut only if every other OPEC and non-OPEC producer followed suit. Iran has argued it should be exempt from such limits as its production recovers after the lifting of EU sanctions earlier this year.

The Saudi and Iranian economies depend heavily on oil, but in a post-sanctions environment, Iran is suffering less pressure from the halving in crude prices since 2014, and its economy could expand by almost four per cent this year, according to the International Monetary Fund.

Riyadh, on the other hand, faces a second year of budget deficits after a record gap of $98 billion last year and a stagnating economy.

Corrections

  • Due to an editing error, a previous version of this story indicated the production cut proposed is 1.3 million barrels daily. It is actually 740,000 barrels daily.
    Sep 28, 2016 5:12 PM ET

With files from Reuters and the CBC's Bryan Labby