Gas prices surge after OPEC cuts production

Gas prices surge after OPEC cuts production

OPEC has agreed to cut production for the first time in years and it's already had an impact on the price of crude oil across the globe.

The cartel agreed Wednesday to cut output by 1.2 million barrels a day, reversing a strategy that produced lower oil prices and pain for USA drillers but saved money for consumers. This number constitutes 1% from the global oil production. Nevertheless, the agreement helps ease some of the supply-side pressures holding oil prices back.

The price of Brent crude rose 1.3% to $52.51 a barrel, after soaring 8.8% on Wednesday.

"The lack of firm output commitments from some non-OPEC producers may not be a major cause of concern, but the threat posed by non-compliance and the potential for USA shale operators to spoil the party should not be ignored", brokerage PVM Oil Associates said.

It says its goal is to ensure the stabilisation of oil markets, "in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry". OPEC says that non-OPEC producers have agreed to cut output by 600 mbpd, which would mean a total cut of 1.8 mmbpd, nearly 2% of global output.

Gas prices had been on a downward trend in the U.S. Regular was 6 cents cheaper on Thursday than a month ago and 10 cents cheaper than in early October. Its readmission past year received surprise, signalling to some that Opec had abandoned its role as a defender of oil prices.

The good news for drivers is prices at the pump remain low, at least so far.

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Jane Sydenham, investment director at Rathbone Investment Management, said: "While at present the news is good for the markets, it is much more hard to say how this will play out in the longer term".

US crude oil was up 48 cents or 1% to $50.01 a barrel at 11.16 GMT, a level not seen since October 25.

News of a pending agreement apparently was enough to raise the price per barrel on Wednesday.

Barriers to the cuts could come on multiple fronts-from members who fail to observer the cuts in the long- or near-term, from non-OPEC members who similarly increase output and from shale producers who flood the market.

So how high will oil prices go? The number of active USA drilling rigs bottomed out at 404 in May and has been rising since, to just below 600 last week.

Rystad Energy's analysis shows that shale production is expected to grow significantly from 2018, with a yearly addition of 1 million bbl/d, whilst offshore will see a production decline from 2018. The forecast put oil at $50 a barrel next year. Both Goldman and Barclays said oil prices would quickly move above $50 per barrel if a production cut is agreed by OPEC. "Some analysts believe higher prices will be hard to sustain, as non-OPEC countries may be enticed to cash-in by ramping up production, thus leading to even more glut, and sending prices lower as a result".

But key OPEC members appear to disagree over details of the agreement and some analysts have suggested the meeting may fail to reach a deal or produce one that is unworkable. The specialty firms that do the fracking have raised prices because "they are booked out through June or July".