Oil prices jumped more than 8% on Wednesday to a five-week high as newswires reported that the Organization of the Petroleum Exporting Countries had agreed its first oil output cuts since 2008.
An OPEC source told Reuters on Wednesday that the cartel, which produces one-third of the world’s oil, had firmed up an agreement in line with a tentative deal reached in Algiers in September. That would involve cutting output from a current level of around 33.6 million barrels a day to somewhere between 32.5 million and 33 million.
Bloomberg said the new ceiling would be at the lower end of that range, an effective cut of between 1.1 million and 1.2 million barrels a day from current levels.
Brent crude futures for delivery in January were up $4 a barrel, or 8.5%, at $51.32 a barrel by 0915 ET, recovering from a drop of nearly 4% on Tuesday and on course for their biggest one-day move in nine months. U.S. West Texas Intermediate (WTI) crude futures were $3.63 higher at $48.86 a barrel, a one-week high.
The volatility is acute because world markets are still badly oversupplied, and prices have edged up since September almost exclusively on the hope that OPEC would rein in output and end the price war that began in late 2014. Analysts at Goldman Sachs, Barclays, and ANZ had said oil prices would quickly fall to the low $40s a barrel if OPEC failed to cut output.
However, if the cut sticks, then the International Energy Agency reckons that the world market could “move from surplus to deficit very quickly in 2017”, leading prices to rise sharply once the existing stock overhang is depleted.
Reuters contributed to this report.
