Oil prices surged on Wednesday after the Organization of the Petroleum Exporting Countries (OPEC) clinched a deal to cut production for the first time in eight years in an effort to stabilize market.
The OPEC oil cartel defied public expectations Wednesday and agreed to lower its output by 1.2 million barrels per day to 32.5 million barrels per day, effective from Jan. 1 for six months.
The cut, the first of its kind since 2008, is at the low end of production of a preliminary agreement sketched out in the Algerian capital of Algiers in September.
The group will meet in May 2017 again to discuss a possible six-month extension of the deal. The reduction is also being coordinated with non-OPEC country Russia, which committed itself to reducing its output by 300,000 barrels per day.
It is the first time since 2001 that Russia joins OPEC in output reduction effort. The country had long resisted cutting output and pushed its production to new record highs in recent months.
The market was boosted by the release of OPEC deal details. The West Texas Intermediate for January Delivery increased 4.21 U.S. dollars to settle at 49.44 dollars a barrel on the New York Mercantile Exchange. The crude futures rose about ten percent in intraday trading, the largest one-day move since February. The Brent crude for January delivery added 4.09 dollars to close at 50.47 dollars a barrel on the London ICE Futures Exchange.
Lifted by the surging oil prices, the energy sector spiked 4.82 percent as the biggest advancer in the S&P 500's 10 sectors.
Shares of energy giants Chevron Corporation and Exxon Mobil Corporation rallied 2.03 percent and 1.63 percent, respectively.
The surging oil price also contributed to the rising of the dollar. The greenback rose against other major currencies as it spurred investors' views of higher inflation in the coming months.
The deal came as a surprise for both investors and analysts. Oil prices slumped by almost 4 percent on Tuesday and Goldman Sachs Group Inc. saw only 30 percent chance of oil producers to reach an agreement.
"This is certainly the best present traders could have for Christmas," said Naeem Aslam, chief market analyst at Think markets in an interview with CNBC. "The cartel has shown a united front and this is what matters the most. There have been so many doubts over the year if they have the ability to deliver anything and today they have," he added.
The OPEC countries' economies and government finances have suffered in the past two years following a price crash in 2014, which analysts said was the major reason why the group finally overcame differences among themselves.
The group is estimated to earn 341 billion dollars from oil exports this year, a sharp drop from 753 billion dollars in 2014, according to the U.S. Energy Information Administration.
"The global oil market has witnessed a serious challenge of imbalance and volatility pressured mainly from the supply side. It has led to significant investment cuts in the oil industry, which has a direct impact on offsetting the natural depletion of reservoirs and in ensuring security of supply to producers," OPEC said in a press release on Wednesday.
"Current market conditions are counterproductive and damaging to both producers and consumers, it is neither sustainable nor conducive in the medium-to long-term," the group said, adding that there is firm and common ground for continuous collaborative efforts among producers, both within and outside OPEC.
However, analysts are cautiously optimistic about oil price advances as the strength of the deal depends on whether all participants can keep their promises. Brian Youngberg, Edward Jones Oil & Gas Analyst, said the agreement will accelerate price growth a little, and that the price will stay in the 55-70 dollars range in the long term.
Analysts also warned that the deal might not be as effective on price as expected, because recent production increase among Saudi Arabia-led oil producers made the size of the cut relatively trivial in comparison.
In addition, a higher price will spur U.S. oil production and then bring the price down again.
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