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Spike in oil prices following OPEC deal

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According to Reuters, OPEC has agreed to its first limit on oil production since 2008, as Saudi Arabia finally accepted to curb its production whilst conceding that arch rival Iran will be subject to production freeze at pre-sanctions levels. This effectively means that OPEC will reduce production by 1.2 million bpd to 32.5 million bpd. Following the announcement Brent crude futures spiked 8% to more than US$50/bbl after Riyadh announced it had finally reached a compromise with Iran after insisting in recent weeks that Tehran fully participate in any cut. The development triggered an increase in trading, with Brent futures trading volumes for February and March, when the supply cut will start to be visible in the market, reaching record volumes.

The agreement is also likely to call for a reduction of about 600 000 bbls a day by non-OPEC countries. Whilst the current agreement Morgan Stanley said Monday that an OPEC agreement could boost crude prices by US$5 or more. While the deal is unlikely to be enough to wipe out the crude glut entirely - according to OPEC’s own estimates it needs to pump just 31.9 million bpd from January to June to balance supply and demand.

However, analysts have warned that it is still too early to be optimistic, reminding us that despite the agreed deal, there are still some doubts over the efficacy of the cut. According to Reuters, a source at Barclays said,"This is an agreement to cap production levels, not export levels," British bank Barclays said. "The outcome is consistent with... what OPEC production levels were expected to be in 2017 irrespective of the deal reached."

In addition, US bank Morgan Stanley has said that "scepticism remains on individual countries' follow-through (on the cut), which is keeping prices below year-to-date highs (of US$53.73/bbl in October) for now."

Despite the jump in prices, they are still only at September-October levels - when plans for a cut were first announced - and prices are at less than half their mid-2014 levels, when the global glut started.

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