Oil deal sparks FTSE rally

Added 29th September 2016

A surprise deal struck by OPEC to reduce oil production sparked a market rally this morning.

Oil deal sparks FTSE rally

The FTSE 100 is trading up over 1% at 6922 following the talks between major oil exporters in Algeria. The FTSE 250 is up 0.5% at 17,875. Europe's Stoxx 600 rose 0.7%.

The index’s oil majors BP and Royal Dutch Shell saw large spikes in their shares prices, climbing 4.2% and 5.5% respectively.

Brent Crude climbed nearly $3 a barrel to $48.80 on the news before slipping back a touch to $48.30. WTI Crude followed the same pattern, to be left at $46.90 by mid Thursday morning.

Earlier, the MSCI Asia Pacific Index gained 0.5% while Japan's Topix climbed 0.9%. 

Countries including Saudi Arabia, Qatar, Iran, Algeria and Nigeria reached an unexpected agreement to reduce crude production by around 700,000 barrel per day to limit total production to between 32.5 million and 33 million barrels.

“Overnight we heard that there will be some production cuts by OPEC and that is an important development for the markets,” commented Marino Valensise, head of multi-Asset at Barings. “Why is that happening? The issue with the price of oil has been supply, not so much demand, which keeps on increasing and was the driving force behind OPECs decision. There has probably been around 1.5 million barrels per day extra supply in the world over the last couple of years, particularly because the US has been pumping a lot of oil.”

“OPECs decision overall is a positive - it will stabilise the price of oil, but it doesn’t change the big picture, which is a cap on the price of oil at around the USD $55 per barrel level,” he added.

“The overnight news from OPEC has revived risk appetite, with investors returning in droves and finding particular bargains in the oil sector,” said Chris Beauchamp, chief market analyst at IG. “BP and Shell between them comprise nearly half of the gains to the index in terms of points, as these stocks suddenly look a lot more attractive based on improved expectations for oil prices. Miners are pushing strongly higher as well, as the shift back to risk assets benefits these growth plays.”

“Expectations of a bigger cut to output later on in the year, ideally with Saudi Arabia and Russia, the two biggest players, doing their bit, could see oil reverse its traditionally weak performance in the fourth quarter and push higher,” noted Beauchamp. “It turns out that OPEC members can agree, and no doubt oil companies and their investors will be hoping that this outbreak of amity continues into the end of 2016.”

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Alex Sebastian

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Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.

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