OPEC is near an agreement to cut production for the first time in eight years, sending oil prices surging on optimism a deal will start to drain record global inventories.

Under the terms being discussed by ministers in Vienna, the group would cut production by 1.4 million barrels a day, equivalent to about 1.5 percent of global production, according to a delegate. In addition, oil producers outside OPEC, including Russia, would contribute cuts of about 600,000 barrels a day, they said.

The outlines of the deal emerged as ministers on their way into the meeting struck a markedly more optimistic tone than in recent days, signaling the group’s three largest producers -- Saudi Arabia, Iran and Iraq -- have overcome differences on how to share the burden of cuts. It appears Iran will be able to raise production as it recovers from sanctions on its oil industry.

“I am very optimistic we’re going to come up with very fruitful results,” Iraqi Oil Minister Jabbar al-Luaibi said, before sitting down for the final ministerial meeting. “There will be a cut, yes, definitely."

Benchmark Brent oil futures rose as much as 8.8 percent in London trading, the biggest gain since February, to $50.45 a barrel.

David Fuller's view

Potentially, a credible deal to cut up to 1.5% of global production would enable Brent Crude Oil to range above $50 a barrel for an indefinite period.  However, there has long been a credibility issue with OPEC announcements, and we should really be talking about OPEC plus Russia.   

An understandably cynical market will monitor developments for this OPEC ‘deal’ very closely.  They know that it could just be another ruse to lift crude prices for long enough so that producers can hedge up to a year forward at higher prices in this contango market.  For instance, Brent crude for December 2017 is reasonably liquid and trading over $3 higher than the shortest duration contract which is now February 2017. 

Of course the Catch-22 for OPEC is that US shale oil producers will also have done some hedging following this Wednesday’s announcement of an agreement to reduce supply.  They are private companies, operating independently in the USA, and obviously under no influence from OPEC.  Operating in their own interests, shale producers will increase production in line with higher prices, ensuring that we never again see crude oil trading anywhere near $140, as occurred in 1H 2008.  Even in an uncertain world, future peaks for crude oil will mostly be well below $100, thanks to technology.