OPEC Agrees to Cut Oil Production, Risk Appetite Rises
The Organization of Petroleum Exporting Countries (OPEC) made a positive surprise move by agreeing to cut crude oil output for the first time in eight years. Reportedly, OPEC reached a preliminary agreement to limit oil production to 32.5 - 33.0 million barrels of oil per day (bpd), down from the current level of 33.5 million bpd. Although a formal agreement is yet to be reached (expected to happen in November) markets warmly welcomed the news: oil jumped 5 percent, while US energy stocks gained overnight. In Asia assets are extending the gains on Thursday (29/09).
However, details of the OPEC negotiations are not clear yet and we may need to wait to November to receive all key details of the (formal) agreement. Although an OPEC oil output cut to 33 million bpd could largely eliminate oil surpluses, it is also important to see the response of non-OPEC oil producers to this news. If the non-OPEC producers decide to ramp up crude production then it offsets the positive impact of the latest OPEC move.
Over the past six years the global economy has been stuck in a low growth environment, hence demand for crude oil has been low accordingly. Despite the OPEC's preliminary agreement to cut output, there are still no signs of any clear and major long-term changes to occur in the market that can give rise to long-term oil price growth. However, given yesterday's news - provided non-OPEC producers will not suddenly boost production - it is possible to reach a price of USD $55 per barrel later this year.
After the 5 percent oil price rally on Wednesday (a development that encourages risk appetite), Asian stocks climbed on Thursday when the markets opened. It is in particular good news for Malaysia, Asia's only big net oil exporter. Malaysia's ringgit appreciated by the most in seven weeks (against the US dollar).
By 09:45 am local Jakarta time on Thursday (29/09), Indonesia's benchmark Jakarta Composite Index had jumped 0.65 percent, while the Indonesian rupiah had appreciated 0.04 percent to IDR 12,952 per US dollar. Indonesian assets should benefit from higher risk appetite on Thursday. Indonesia is also a member of the OPEC. However, Southeast Asia's largest economy is a net oil importer.
Read more: Overview of Indonesia's Oil Industry