Crude oil prices rose by more than 4% on Thursday, one day after OPEC stunned skeptics and reached an agreement to cut production for at least six months.
Global benchmark Brent crude for February was gaining by 4.4% to $54.13 a barrel midday Thursday, marking the highest level in more than a year. Meanwhile, West Texas Intermediate crude was up 4.1%, trading at around $51.49. WTI surged by as much as 9% on Wednesday following confirmation of the OPEC deal.
OPEC member nations agreed to curb production by 1.2 million barrels a day to bring the ceiling to 32.5 million barrels a day, effective Jan. 1, 2017. The deal marks the first limit on output in eight years as the cartel looks to rebalance the oil market and boost prices.
"With a greater than 1 million barrel-a-day cut, our commodities team sees oil prices moving above $50 a barrel in the near term, and potentially as high as $59 a barrel in 2017 with firm quotas and a tight control mechanism," Bank of America Merrill Lynch analysts said in a note Wednesday.
OPEC's leading producer, Saudi Arabia, is making the biggest production cut of 486,000 barrels a day. No. 2 producer, Iraq, also agreed to curb production, a surprise to many after the country pushed to be exempt in order to use oil revenue to fight ISIS militants. Iran, meanwhile, will be allowed to boost production slightly from its October levels.
In addition to the organization's 1.2 million barrel-a-day cut, the deal is subject to another 600,000 barrel-a-day output reduction by non-OPEC members. Russia already has agreed to cut production by 300,000 barrels a day, OPEC President Mohammed Bin Saleh Al-Sada said during a press conference at the 171st Meeting of the Conference of the Organization of Petroleum Exporting Countries.
Although there are already doubts over whether OPEC will be able to successfully implement the production limit, the cartel established a Ministerial Monitoring Committee composed of Algeria, Kuwait, Venezuela and two participating non-OPEC countries to ensure the proposed cuts become a reality.
"OPEC's adherence to the agreement will be critical, and although its track record is poor, for the time being oil prices have received a huge support," Jefferies chief global equity strategist, Sean Darby, wrote in a research note Thursday.
Analysts, however, anticipate U.S. producers to be the big winners of the OPEC deal.
"Given the short-cycle nature of the U.S. onshore oil and gas market, we see a potentially immediate positive impact on the outlook for U.S. onshore drilling and completion activity should the oil price move above the $50 a barrel level," the analyst team at Bank of America Merrill Lynch wrote. "Land drilling would also see a benefit, in both the lower-cost SCOOP/STACK and Permian basins that have seen the most activity increase since May, but more importantly in higher-costs basins such as Eagle Ford and Bakken as more drilling locations become economic in higher price environments."