Oil Prices Gain 4% Following OPEC Production Deal

Iranian Oil Minister Bijan Zanganeh told reporters upon arrival at OPEC’s headquarters in Vienna that his country was not prepared to reduce output: “We will leave the level of production (where) we decided in Algeria”.

The OPEC deal “will provide some price momentum but it can not be compared with the cut seen back in 2008”, a Singapore-based trader said, referring to the last OPEC production cut at 4.2 million bpd. Saudi Arabia and its Gulf allies, the U.A.E. and Kuwait, have traditionally stuck to their cuts, but some others haven’t, particularly when prices are low. OPEC has sent stark reminder that when circumstances change, it can change too – and it would be foolish to write off OPEC as irrelevant.

“OPEC hasn’t been able to slay the dragon that is the US shale boom”, Smith said. “A lot of these countries are highly dependent on revenues derived from oil exports”, said Yie, an equity analyst focused the North American energy, financial services and consumer sectors. At the same time, demand is expected to grow by around 1.3 million bbl/d.

The reduction is being coordinated with non-OPEC country Russian Federation, which promised to cut its production by 300,000 barrels per day.

The Saudis had seen this movie before.

The OPEC commitment alone could end market oversupply, and should result in a gradual decrease in OECD oil stocks throughout 2017.

West Texas Intermediate (WTI) for January delivery rose as much as US$0.80 to US$50.24 per barrel on the New York Mercantile Exchange (NYME), ending US$4.21 higher to close at US$49.44 as aggregate trading volume on the NYME rose to a record 2.5 million contracts, according to data compiled by Bloomberg. Also, analysts expect the momentum to lose some steam on account of lower consumption due to disruption caused by demonetization and global headwinds. “The past month or so has shown that price volatility is still a significant concern.From the supply and demand perspective, there are signs that the rebalancing of the fundamentals is underway”.

“It looks achievable on the face of it, provided the parties to the latest production cut deal stick to their pledges, which has historically been somewhat of a sticking point”, ANZ bank said on Friday. Importantly, so does the economic situation within OPEC countries, including Saudi Arabia. “But, maybe, in the second half of 2017, there can be flattening or small increase in US oil production”. Iranian oil production is back to near pre-sanctions levels. “The catalysts for a further rally in prices will need to come from confirmation of participation by non-OPEC producers, evidence of compliance by OPEC producers and more clarity on what Iran has agreed to do”. These factors mean our gradual oil recovery scenario remains a valid conservative assumption, although the stress case, assuming oil retreating below USD40/bbl, is now much less probable.

The remaining 2 per cent is held by minority shareholders after delisting of Essar Oil. While production has declined about 1 million bpd from its April 2015 peak, the industry has become remarkably more efficient. In the meantime, the long-run marginal cost of United States shale continues to fall. With prices stabilizing in the mid-$50 range, U.S. drilling activity is expected to increase.

Investors are clearly betting the OPEC agreement, if it’s adhered to by self-interested members, will help fix the epic supply glut that caused prices to collapse in the first place.