Australia's leading oil producers will be on watch today following the surprise news that the Organisation of Petroleum Exporting Countries (OPEC) has come to an agreement to cut production for the first time in over eight years.
According to Bloomberg, OPEC has agreed to reduce output by approximately 1.2 million barrels a day by January 2017 in an attempt to tackle record global inventories and boost prices. This will bring the cartel's overall daily output down to 32.5 million barrels a day. Non-member Russia has also agreed to cut back on production by 300,000 barrels a day.
The agreement has already had the desired effect and sent oil prices surging higher. Overnight WTI crude oil climbed 9.6% to $US49.57 a barrel and Brent crude oil increased 8.6% to $50.36.
This will no doubt be great news for shareholders of the likes of Santos Ltd (ASX: STO), Woodside Petroleum Limited (ASX: WPL), Beach Energy Ltd (ASX: BPT), and Oil Search Limited (ASX: OSH).
Their respective shares had come under heavy selling pressure this week as doubts over a cut from OPEC surfaced. But they now look set to follow in the footsteps of European and North American energy shares which soared overnight.
Whilst the OPEC production cut is a great boost for oil prices in the short term, I'm not entirely convinced that they will remain high in the long-term.
As prices rise I expect more low-cost shale oil producers in the United States to come online and increase production. Unfortunately for Australia's oil producers this could offset the OPEC production cut and drive prices lower again.
For this reason I won't be gambling on oil shares in 2017. There are far better and less risky areas of the market to invest in my opinion.
