Oil prices keep a grip on rally after OPEC deal

But impact of the decision, reached by members of the Organization of Petroleum Exporting Countries and non-member Russian Federation, could be fleeting in the face of a worldwide initiative to counter global warming and rely more on renewable sources of energy. Drivers did have some good news in November when petrol and diesel prices fell for the first time in four months as retailers finally passed on wholesale savings thanks to a lower oil price. As for Kuwait, Algeria, and Venezuela, all three countries are committed to comply by the production caps.

Meanwhile, Saudi Arabia, OPEC’s most powerful member, agreed at the Vienna meeting to cut 500,000 bpd from its output.

The OPEC deal “will provide some price momentum but it cannot 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.

Oil market volatility, as measured by the Chicago Board Options Exchange Crude Oil Volatility Index, dropped for a second day as the OPEC agreement reverberated. The EIA, for example, saw oil prices averaging just $49 per barrel next year.

Brent oil climbed to the highest level this year after OPEC approved its first supply cuts in eight years, with the focus now shifting to how strictly the group will implement the deal. Oil prices are up 10 pct this week topping $53 a barrel. As a net importer of oil, it would have preferred the price to remain low rather than high.

The Minister of State for Petroleum Resources, Ibe Kachikwu, recently announced the signing of an agreement on behalf of the federal government for a $15 billion oil and gas investment package with India to bolster Nigeria’s oil crude production. The shift – aimed at draining a crude glut that’s pushed down prices for two years – will help revive the tattered finances of oil-producing countries and will reverberate in markets around the world, from the Canadian dollar to Nigerian bonds to USA shale equities. According to Bloomberg News, the deal is created to drain record global oil inventories.

What will be interesting to observe is the role of how USA oil producers will react.

Additionally, higher oil prices will encourage oil companies to tap their inventories of drilled but uncompleted wells, providing a relatively quick boost to production.

Reuters has speculated that Putin’s idea was that the deal was possible if “Riyadh wasn’t seen to be making too large a concession to Iran”, and if Tehran was careful not to celebrate any perceived victory. The forecast put oil at $50 a barrel next year. The responsiveness of USA oil companies to higher oil prices (in the form of higher production) will help determine whether oil prices as high as $60 can be sustained over the next few years.

Daniel Katzive, head of FX strategy for North America at BNP Paribas says: “Our commodity strategists do not expect this week’s jump in crude prices to be sustained, much less extended”.

In fact, the price collapse crushed the budgets of Saudi Arabia and other OPEC producers, creating financial stress that was unthinkable just years ago.