Oil prices rose almost 10 percent overnight, after the Organization of the Petroleum Exporting Countries agreed its first output cut in eight years on Wednesday. The group will also have its next meeting on May 25 to monitor the deal, which it said it could extend for six months.
Russia, not part of OPEC, has pledged to increase its production cut to 300,000 barrels a day for the first half of 2017, from between 200,000 and 250,000 previously. It appears that Saudi Arabia has dumped its strategy of flooding global oil markets with excessive production, as the kingdom's economy has been falling sharply due to lower oil prices.
"While we acknowledge that OPEC's track record of delivering on production cuts has historically been poor, on a net basis we expect this to tighten crude markets", said Scott Darling, the head of Asia-Pacific oil and gas research at J.P. Morgan.
This will be the first time since 2008 that OPEC would be accomplishing such a feat which is expected to tackle the key challenge of low price of oil in the worldwide market which has affected the global economy with most OPEC member countries including Nigeria feeling the impact.
The development also triggered frenzied trading, with Brent futures trading volumes for February and March expiry hitting record volumes. Total volume traded was about double the 100-day average.
Despite the agreed deal, doubts were widespread. Nevertheless, the agreement helps ease some of the supply-side pressures holding oil prices back.
Meanwhile, Public Investment Bank Bhd in a research note said apart from the Opec cut, non-member countries especially Russian Federation, are also expected to reduce their production to drive prices higher.
He noted that from the supply and demand perspective, there are signs that the rebalancing of the fundamentals is underway.
"The decision has removed a lot of downside risk from the market and we'll probably sniff at $60 even this year", said Bjarne Schieldrop, chief commodities analyst at SEB AB bank in Oslo.
Global surplus had pulled the prices down to $45, which is nearly 50% of its 2014 prices.
However three countries will be exempted from the much-sought consensus to cut oil production by 1.2 million barrels per day, effective January 1, 2017 namely: Nigeria, Iran and Libya.
With cuts only being implemented next year against end-2016 levels, analysts said there was still a possibility that oversupply, which has halved oil prices since 2014, remains in place next year.
Goldman Sachs said on Wednesday that OPEC's agreement to slash oil output would "unleash a sharp production" response in the United States and the rest of the world.