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Shares in oil giants BP and Shell surge on production cut deal

Shares in oil giants BP and Shell surge on production cut deal

The agreement by OPEC countries boosts hopes for a sector which has seen mass job cuts, but could push up prices at the pump.

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Thursday 29 September 2016

Shares in Royal Dutch Shell and BP have surged after top oil producing countries agreed to cut production for the first time in eight years.

Shell climbed 6% and BP was up 4% following the decision by OPEC – with other commodity firms also performing strongly.

The stocks helped the FTSE 100 Index turn 1% higher, with improvements also seen in French and German markets, following an upturn for Asian shares overnight.

OPEC’s agreement on Wednesday helped the price of a barrel of Brent crude climb above $49 overnight, before slipping back slightly.

Oil prices were as high as $115 in June 2014 before slumping to less than $30 earlier this year thanks to weakening demand and oversupply.

But until now the Organisation of Petroleum Exporting Countries – dominated by Saudi Arabia – had failed to reach an agreement to turn off the taps.

The OPEC deal boosts hopes for companies in the oil sector, which has been severely hurt by the downturn.

A report into the North Sea oil and gas industry this week estimated 120,000 people had lost their jobs over the past two years.

However, lower oil prices have helped other parts of the economy, with cheap fuel helping consumer spending power and keeping a lid on inflation.

The deal reached by OPEC countries on Wednesday saw Saudi Arabia soften its stance on smaller producers such as Iran, allowing them to keep pumping oil “at maximum levels that make sense”.

Saudi Arabia had previously insisted it would only reduce its output if every other oil producing country did the same.

OPEC had been keeping production high to try to counter the growing threat from shale oil production by the US, which is not an OPEC member.

Iranian oil minister Bijan Zanganeh said the deal, following talks in Algiers, was an “exceptional decision”.

OPEC ministers said they would reduce output to 32.5-33 million barrels per day, down from its current estimated level of 33.24 million.

However, details of how much each country will produce will not be worked out until the next formal OPEC meeting in Vienna in November.

It is not the first time OPEC has tried to bolster prices.

In April, Saudi Arabia said it would cut production if Iran did the same.

But Iran, readmitted to world oil markets this year after being freed of economic sanctions, aggressively increased output to bolster its own public finances.

Earlier this week, amid the pressure on its own coffers, Saudi Arabia announced massive cuts to its public sector wage bill and cancelled bonuses for employees of state enterprises.

The world’s biggest oil exporter’s budget deficit is expected to exceed 13% of total economic output this year.

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