Oil Prices Slip as Investors Wonder Whether OPEC Deal Will Be Enough
Oil prices slipped on Thursday as investors questioned whether an OPEC agreement to curb oil production – the group’s first such deal since 2008 – would be enough to rebalance a heavily over-supplied world market.
The Organization of the Petroleum Exporting Countries agreed on Wednesday to cut output to 32.5-33.0 million barrels per day (bpd) from around 33.5 million bpd, estimated by Reuters to be the output level in August.
Oil prices rose sharply on the news and energy shares rallied in early trading on Thursday. The European oil and gas index soared nearly 5%, while the pan-European STOXX 600 index was up nearly 3%.
But oil prices retreated as skepticism over the deal led to profit taking.
Global benchmark Brent crude oil was down 60 cents a barrel at $48.09 by 08:50 GMT, after earlier climbing to a high of $49.09, its strongest since Sept. 9. Brent settled up $2.72 a barrel, or 5.9%, on Wednesday.
U.S. light crude oil was down 30 cents at $46.75 a barrel, after first hitting $47.47, its highest since Sept. 8. WTI rose $2.38, or 5.3%, on Wednesday.
“While the initial response to the agreement was positive, there are crucial questions to be answered by the organization in the coming weeks,” said Tamas Varga, oil analyst at London brokerage PVM Oil Associates.
U.S. bank Goldman Sachs said it expected the OPEC deal to add $7 to $10 to oil prices in the first half of next year.
But many analysts said they were concerned that too many details had been left unresolved and that the deal could unravel.
How much each country will produce is to be decided at the next formal OPEC meeting in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia.
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It is not clear when the agreement would come into effect, how compliance with the agreement will be verified, what new individual quotas for countries would be and how long the deal would remain in effect, analysts said.
And a cut in OPEC production might do little to reduce oversupply, given uncertainty about output from Iran, Libya and Nigeria.
“The problem of surpluses will not be solved if these countries take full advantage of their capacities,” Commerzbank chief commodities analyst Eugen Weinberg said.