OPEC reaches deal to cut output, oil futures storm higher

In a surprise move, the Organisation for Petroleum Exporting Countries's members reached an agreement - for the first time in eight years - to cut output.

Reports indicated OPEC had reached a consensus to reduce its output to between 32.5m and 33.0m barrels a day, with Algeria having played a key role in brokering a deal.

However, the exact production levels for each country would be apportioned at the next formal meeting of OPEC's ministers.

According to the cartel's latest Monthly Oil Market Report, which referenced secondary sources, output from its members was running at 33.24m barrels per day in August (Barclays Research: 33.0m b/d, IEA: 33.4m b/d).

"Despite remaining uncertainty, the agreement still matters and bears a resemblance to the late 1990s. It matters because it signifies that despite the Saudi/Iranian geopolitical tension, oil policy was able to remain separate from the broader political issues, for now at least," Barclays Research´s analysts Michael Cohen, Miswin Mahesh and Warren Russell said in a research note sent to clients.

On Wednesday, Ian Taylor, the boss of the world's largest oil-trading house, Vitol, told Bloomberg there was a risk that the global oil supply glut would extend into 2018 if producing countries did not act.

Some commentary highlighted that recent belt-tightening by the Saudi Arabian government was one possible factor leading to Wednesday's agreement to prop up crude oil prices.

Over the past weekend, the monetary authority had injected a further $5.3bn of liquidity into the banking sector which, among other things, would help domestic lenders to roll-over credit to ailing contractors, according to Bank of America-Merrill Lynch.

The Kingdom had only just recently announced various measures such as cutting bonuses for government employees, a 20% reduction to ministerial salaries and a 15% cut in the number of Shoura council members.

"According to Bloomberg, the Saudi government is reviewing thousands of projects worth SAR260bn (US$69bn; 11% of GDP) and may decide to cancel a third of them (SAR87bn; US$23bn; 3.7% of GDP)," the investment bank said in a research report sent to clients on 27 September.

Somewhat ironically, Wednesday's news about OPEC came as Bloomberg reported earlier in the day that, based on its own calculations, the Russian Federation mat have increased its output of crude and condensate to an average of 11.1m b/d in September.

That would mark a 400,000 increase versus August and a new post-Soviet era record, thanks to the start of new fields in the country's far north and around the Caspian Sea.

As of 2005 BST, front month Brent crude futures were 5.18% higher to $48.48 per barrel on the ICE, alongside a 4.82% jump in West Texas Intermediate futures to $46.93 per barrel.