News overnight that oil producers cartel OPEC has reached an agreement on its first output cut since 2008 saw oil prices settle up 6% on Wednesday and is prompting widespread strength in the oil and gas sector.

Royal Dutch Shell (RDSB) gains 5.1% to £19.93 and BP (BP.) 4.1% to 449.5p. Tullow Oil (TLW), EnQuest (ENQ) and Premier Oil (PMO), particularly leveraged to crude prices due to their indebtedness, are up 8.7% to 237.7p, 9.1% to 27p and 8.2% to 66.25p respectively.

Few predicted a deal would emerge from the unofficial OPEC summit in Algeria, mainly because of Saudi Arabia's stance, further complicated by its testy relationship with Iran. The latter is ramping up production having recently emerged from sanctions while the Saudis have been looking to protect market share.

The reported cut is 700,000 barrels per day (bpd) to 32.5 million bpd. Deutsche Bank gives a decent summary. 'Agreed on the sidelines of the International Energy Forum in Algiers, indications are that the agreement may follow the outline of an Algerian proposal for a 1.6% reduction from the Jan-Aug averages for all member countries apart from Libya, Iran and Nigeria.

'Under this proposal, Iran would be permitted to raise production only up to 3.7 mmb/d, a small increment from its reported August production of 3.64 mmb/d.' The investment bank adds there is chance Russia might participate in the production freeze.

The resulting rally in prices may prove shortlived however. The European and US benchmarks, Brent and West Texas Intermediate (WTI) are already starting to give back a modest portion of yesterday's gains with details on the deal unlikely until the full OPEC meeting on 30 November. Investment bank Goldman Sachs, which earlier this week trimmed its year end WTI forecast from $50 to $43 per barrel, stands by the downgrade.

Issue Date: 29 Sep 2016