The price of oil climbed by around 3% on Friday following a deal by major oil producing nations to cut production in an attempt to support falling oil prices.
Members of the Organisation of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC oil producers led by Russia have agreed to decrease oil production by a combined 1.2 million barrels per day from 2019.
The announced cut was larger than the 1 million barrels per day the market had anticipated. As a result of the deal, the price of Brent crude oil rose around 3% to US$62 a barrel.
Production Cut
OPEC members will reduce output by 800,000 barrels per day from January whilst the non-OPEC allies have agreed to slash output by a further 400,000 barrels per day. The planned cut in production comes as the oil industry has grappled with a 30% drop in prices since early October where the price of Brent crude oil peaked at around US$86 a barrel.
The steep fall in oil prices over the last 2 months has occurred due to forecasts of lower demand from a weakening global economy and a rise in shale production in the United States. Oil production in the United States has risen by 2.5 million barrels per day to 11.7 million barrels per day since early 2016. This has seen the United States surpass Saudi Arabia as the world's largest oil producer.
ASX Impact
The bearishness in the oil market has impacted Australian oil producers such as Beach Energy Ltd (ASX: BPT), Oil Search Limited (ASX: OSH), Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) who have all seen their share prices fall by over 20% since early October. In spite of Friday's deal, all of the major ASX oilers are in negative territory in Monday morning trade along with the broader market.
Whether the agreed upon reduction in output is sufficient to put a floor under oil prices remains to be seen. In the meantime, investors may find better opportunities on the Australian market in other companies with superior growth prospects.
