Reduction may only act as ‘interim support’ for market, say analysts

The proposed production cut may only act as an “interim support” for the market, according to analysts.

Saudi Arabia’s energy minister said a one-millionbarrel daily cut could be enough to stabilise prices, however this may not make a meaningful difference for some time.

Investors had expected a cut of around 1.3m barrels per day, sending the price of Brent crude down 5% after the comment yesterday, however the actual scale of the cuts has not yet been agreed.

Jack Allardyce from Cantor Fitzgerald thinks the market will need to wait and see what effect will have.

He said: “While an agreement to cut at least 1mmbopd should go some way towards arresting the freefall in benchmarks, we wouldn’t expect any significant short-term recovery until there is further evidence that such a deal is beginning to eat into the current supply glut.” it

The US could extend its production next year, while the full effects of Iranian sanctions remain to be seen, according to Mihir Kapadia, CEO of Sun Global Investments, with both issues playing a part in the oil price.

He said: “Opec’s announcement that it has agreed to cut oil output should be considered a sensible move in what has been a very volatile market this calendar year.”

He continued: “With Opec now affirming to continue the production cutback strategy, there should be some shortterm support to the failing prices.

“Oil prices over the last two months have crashed around 30%, directly impacting oilled economies like Saudi Arabia.

“While this is a muchneeded announcement, it can only act as an interim support for the market as much depends on the US production output and the situation that will prevail once the eight wavier countries cease Iranian imports.”