Oil Keeps Rising After OPEC Output Deal

1st Dec 2016

Oil prices rose on Thursday, building on gains made after OPEC struck a long-sought agreement to reduce production by 1.2 million barrels a day.

Brent crude, the global oil benchmark, rose 1.4% to $52.56 a barrel on London’s ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 1.2% at $50.02 a barrel.

The agreement struck by representatives of the Organization of the Petroleum Exporting Countries marked the group’s first concerted effort to slash output since 2008 and sent prices surging more than 10% Wednesday.

The cut, representing about 1% of global production, will help to reduce a supply glut that has depressed prices for more than two years. It involves significant reductions by heavyweights including Saudi Arabia, the group’s most powerful member and de facto leader of the cartel.

“Mopec-oilarket forces have brought supply and demand back close to balance already. The cuts are more intended to accelerate the rebalancing process and in particular the drawdown of the large inventory overhang,” said Gordon Gray, global head of oil and gas equity research at HSBC.
Analysts say the biggest question remains enforcement, as OPEC has no authority to make its members comply. OPEC members have a history of producing beyond their allotted quotas.

Adam Longson, commodities analyst at Morgan Stanley, said that OPEC exceeded its quota by an average of 883,000 barrels a day from 2000-2008.

“Reported OPEC production will likely be higher than suggested based on recent trends and history,” he said.

The group is expected to reassess the effectiveness of the deal in six months.

“While we acknowledge that OPEC’s record of delivering on production cuts has historically been poor, on a net basis we expect this to tighten crude markets,” said Scott Darling, the head of Asia-Pacific oil and gas research at J.P. Morgan.

The deal is expected to accelerate the rebalance of supply and demand in the market, which will likely shift to a 500,000-barrel deficit in the first half of next year, Bernstein Research said. It added that the deficit could rise to more than 1 million barrels a day by the second half of next year.

Higher prices, however, are likely to cause more U.S. shale producers to increase production.

The latest production data from the U.S. Energy Information Administration showed U.S. production increased by 9,000 barrels a day to 8.7 million barrels for the week ended Nov. 25.

“There is a real risk that higher prices could reactivate more dormant shale oil,” said ANZ Research, which expects international oil prices to hit strong resistance at around $60 a barrel in early 2017.

Another wild card is the cooperation of non-OPEC producers, which are expected to decrease production by 600,000 barrels a day. Russia said it would cut production by 300,000 barrels a day, though it isn’t clear how much of that will come from already-expected declines.

“In fact, we’re not even fully confident that Russia will freeze production, particularly if the market tempts them with higher prices,” said Tim Evans, a Citi Futures analyst.

Nymex reformulated gasoline blendstock—the benchmark gasoline contract—rose 1.5% to $1.51 a gallon. ICE gas oil changed hands at $462.00 a metric ton, up $13.75 from the previous settlement.

Article taken from The Wall Street Journal – credit goes to Sarah McFarlane and Jenny W.Hsu

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