Oil skyrockets on OPEC production cuts: Is it time to buy oil shares?

Oil prices skyrocketed overnight after OPEC agreed to modest oil output cuts – the first such deal since 2008.

Brent oil, which is the global benchmark, raced higher to almost US$49 a barrel – up nearly 6% – while US West Texas Intermediate (WTI) soared more than 5% to a little over US$47 a barrel. Both are now trading at their highest prices in more than two weeks.

OPEC, or the Organisation of Petroleum Exporting Countries, is an inter-governmental organisation made up of 14 countries that acts as an oil cartel. In November 2014, a decision by OPEC to allow an oversupply of oil in the global market caused oil prices to crash to historically low levels early in 2016.

Overnight, however, OPEC announced they would reduce their production to around 32.5 million barrels per day, down from around 33.24 million. The output level for each member nation won’t be decided until November, but it seems overall production will be reduced by around 700,000 barrels per day, which will help ease the current supply and demand imbalance.

Australia’s energy shares are jumping on the news:

The decision is seen as a major concession by Saudi Arabia, the de facto OPEC leader. As quoted by CNBC: “The big takeaway is how into a corner the Saudis have backed themselves. This whole plan has backfired on them. They’re going to be bearing most of the cutback if they pull it off, and they’ve had to really kowtow to the Iranians in this whole thing.”

The energy sector has endured a horrendous couple of years, and many investors have been burned as a result. The overnight decision is certainly a step in the right direction, but oil prices are still not guaranteed to continue rising. Indeed, Russia has plans to increase its own production outside of OPEC, while American producers could also take advantage of higher prices and increase their own supply.

Some investors may choose to return to the sector following the overnight news, but they do need to be wary of those risks. Others with a lower tolerance for risk should continue to look elsewhere in the market for other great opportunities.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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