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Oil Prices Slip as Investors Wonder Whether OPEC Deal Will Be Enough

September 29, 2016, 9:59 AM UTC
Surging Oil Industry Brings Opportunity To Rural California
TAFT, CA - JULY 22: Oil rigs just south of town extract crude for Chevron at sunrise on July 22, 2008 in Taft, California. Hemmed in by the richest oil fields in California, the oil town of 6,700 with a stagnant economy and little room to expand has hatched an ambitious plan to annex vast expanses of land reaching eastward to Interstate 5, 18 miles away, and taking over various poor unincorporated communities to triple its population to around 20,000. With the price as light sweet crude at record high prices, Chevron and other companies are scrambling to drill new wells and reopen old wells once considered unprofitable. The renewed profits for oil men of Kern County, where more than 75 percent of all the oil produced in California flows, do not directly translate increased revenue for Taft. The Taft town council wants to cash in on the new oil boom with increased tax revenues from a NASCAR track and future developments near the freeway. In an earlier oil boom era, Taft was the site of the 1910 Lakeside Gusher, the biggest oil gusher ever seen in the US, which sent 100,000 barrels a day into a lake of crude. (Photo by David McNew/Getty Images)
David McNew/ Getty Images

Oil prices slipped on Thursday as investors questioned whether an OPEC agreement to curb oil production – the group’s first such deal since 2008 – would be enough to rebalance a heavily over-supplied world market.

The Organization of the Petroleum Exporting Countries agreed on Wednesday to cut output to 32.5-33.0 million barrels per day (bpd) from around 33.5 million bpd, estimated by Reuters to be the output level in August.

Oil prices rose sharply on the news and energy shares rallied in early trading on Thursday. The European oil and gas index soared nearly 5%, while the pan-European STOXX 600 index was up nearly 3%.

But oil prices retreated as skepticism over the deal led to profit taking.

See also: Goldman Sachs Says the New OPEC Deal Could Raise Oil Prices by $10

Global benchmark Brent crude oil was down 60 cents a barrel at $48.09 by 08:50 GMT, after earlier climbing to a high of $49.09, its strongest since Sept. 9. Brent settled up $2.72 a barrel, or 5.9%, on Wednesday.

U.S. light crude oil was down 30 cents at $46.75 a barrel, after first hitting $47.47, its highest since Sept. 8. WTI rose $2.38, or 5.3%, on Wednesday.

“While the initial response to the agreement was positive, there are crucial questions to be answered by the organization in the coming weeks,” said Tamas Varga, oil analyst at London brokerage PVM Oil Associates.

U.S. bank Goldman Sachs said it expected the OPEC deal to add $7 to $10 to oil prices in the first half of next year.

But many analysts said they were concerned that too many details had been left unresolved and that the deal could unravel.

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

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It is not clear when the agreement would come into effect, how compliance with the agreement will be verified, what new individual quotas for countries would be and how long the deal would remain in effect, analysts said.

And a cut in OPEC production might do little to reduce oversupply, given uncertainty about output from Iran, Libya and Nigeria.

“The problem of surpluses will not be solved if these countries take full advantage of their capacities,” Commerzbank chief commodities analyst Eugen Weinberg said.