Markets rally after Opec agrees on first output cut in eight years

Algerian Energy Minister Noureddine Boutarfa (centre) and Opec president Mohammed bin Saleh al-Sada (left) arriving for a press conference after an Opec meeting on Wednesday in the Algerian capital of Algiers.
Algerian Energy Minister Noureddine Boutarfa (centre) and Opec president Mohammed bin Saleh al-Sada (left) arriving for a press conference after an Opec meeting on Wednesday in the Algerian capital of Algiers.PHOTO: AGENCE FRANCE-PRESSE

A historic deal among members of the Organisation of Petroleum Exporting Countries (Opec) to cut output for the first time in eight years fuelled hopes of a recovery in the energy industry and cheered stock markets across the world.

Japanese stocks climbed 1.4 per cent while Singapore's Straits Times Index rose nearly 1 per cent. Blue-chip oil and gas counters like Keppel Corp led the rally here.

The deal had seemed unlikely with Saudi Arabia, the world's largest crude producer, butting heads with Iran, which was resisting production cuts. Iran was eventually exempted from slashing its output but other Opec members - who have been battered by falling oil prices - agreed to reduce the cartel's production to between 32.5 million and 33 million barrels a day.

The cartel currently pumps out 33.24 million barrels a day and has seen oil prices slide from more than US$100 a barrel in mid-2014 to near 13-year lows below US$30 in January.

The prospect that the lower supply would put a floor under oil prices initially saw crude oil prices shoot up 6 per cent to US$49 a barrel. These gains soon evaporated on profit taking.

Malaysia's ringgit also strengthened to a seven-week high as prospects brightened for the oil-exporting country. But Phillip Futures investment analyst Woon Tian Yong warned that this may just be a temporary reprieve as no formal agreement is in place yet - output levels for each member will be determined only at the next meeting on Nov 30 - and controversy surrounding Malaysia's 1MDB saga continues to dog the economy.

On a more global scale, observers are discussing if this latest attempt to stabilise oil prices will work, given that growth is still tepid worldwide.

Some wonder if the production cut is deep enough to arrest the oversupply. "The quick answer remains a resounding 'no'," said OCBC economist Barnabas Gan. "The cut of as much as 900,000 barrels per day from Opec's current production is grossly small." He pointed out that Opec is still producing much more than its production quota of 30 million barrels per day some years back.

Opec is also not as influential as it used to be, Bank of Singapore chief economist Richard Jerram noted. "A 41 per cent market share is not enough to dominate the market now that shale production has increased supply. We are already seeing US activity picking up in response to the bounce in prices over the past six months," he said.

The devil will be in the details that have yet to be ironed out, said Mr Jonathan Chan, another Phillip's analyst. It also remains to be seen if output will really fall as there have been incidents of quota cheating in the past within Opec, he noted.

CIMB Private Bank economist Song Seng Wun does not see much impact for Singapore for now.

"The oil and gas sector here is already in recession, and quite a lot of debt payments are due. These companies are in pain and need oil prices to rise further so they can pay back their loans. The rebound in oil prices isn't strong enough yet to suggest that bankers or borrowers will be sleeping any easier."

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A version of this article appeared in the print edition of The Straits Times on September 30, 2016, with the headline 'Markets rally after Opec agrees on first output cut in eight years'. Print Edition | Subscribe