The price of oil surged higher on Wednesday after OPEC announced that it would cut oil production in November. Oil prices surged as much as 6% on this news. The global oil glut has weighed heavily on oil prices for many years now. The agreement for such an oil freeze deal was reached on Wednesday. The price of oil has been struggling since its fall in 2014. It had continued to make new lows, because the market was being oversupplied with too many barrels. Before the OPEC deal was reached in Algeria, oil prices were trading higher because of a drop in domestic barrels in the United States. WTI Crude oil closed higher by 5.3% to $47.05 a barrel. Brent Crude oil closed higher by 5.9% to $48.69 a barrel.

Long Time Coming

As noted before oil had been on a traction lower ever since 2014. It hit a high of around $100 a barrel and has since collapsed to its current price of around $47 a barrel. That’s more than 50% of a cut in price in a two-year period. The main problem was that the oil glut has been a worry for the market. The deal reached in Algeria with OPEC would mark the first time in eight years where oil output had been lowered. The good news with respect to this deal is that there is expected to be a drop by one million barrels per day by OPEC. That means that barrel production will go from 32.5 million barrels of oil per day to 33.4 million. Compared to the amount of barrels produced globally each day a one million drop may not seem like a lot, but it definitely will make a gradual difference over time. This is especially true when considering that it may be one million barrels per day, but in a month it creates a drop in production of 30 million barrels.

OPEC Cuts

It has been stated that Saudi Arabia will be responsible for cutting at least 350,000 barrels per day. It has been a long time coming for OPEC to come together to enact such a measure. Why has it taken this long for such a move to occur? The reason is because it has everything to do with Iran and a few other OPEC members. The bad news is that Iran, Nigeria, and Libya are excluded from the deal. This goes back to the notion that other OPEC countries were unwilling to cut their production if Iran and several other countries weren’t also on board with cutting production. It seems that OPEC wants to move to cut oil production regardless of whether or not Iran agrees to a deal. This is what has changed, and why this deal went through on Wednesday. Iran has refused to agree to a cut in production because the U.S. had just recently lifted sanctions against it. It wanted to get back to similar production of oil before the U.S. sanctions were ever implemented. Nigeria and Libya suffered terrorist attacks which left them with a huge gap in production as well.

Inventories Fall

Before the deal was reached with OPEC nations, another piece of positive news helped lift oil prices. The Energy Information Administration — EIA — stated that crude inventories had fallen by 1.9 million barrels in the week ending September 23. Analysts had expected an increase of 3 million barrels. This piece of data provides two positive developments. The first being that the amount of crude inventories had come in better than what analysts expected. When this happens oil prices tend to trade higher as investors feel that demand has probably picked up. The second positive aspect is that it reduces the problems associatedwith the global oil glut. While not removing the risk entirely, it is good to see that the amount of crude inventories has continued to drop. This is especially true considering that this is the fourth week where U.S. crude inventories have fallen.