SINGAPORE: Oil prices shot up more than 12 percent, smashing trading volume records, after producer club OPEC and Russia cut a deal to reduce output to drain a global supply glut, but analysts warned prices could recede as other producers stand by to fill the gap.
The Organization of the Petroleum Exporting Countries (OPEC)agreed on Wednesday its first oil output reduction since 2008 after de-facto leader Saudi Arabia accepted “a big hit” and dropped a demand that arch-rival Iran also slash output. The deal also included the group’s first coordinated action with non-OPEC member Russia in 15 years.
“OPEC has agreed to an historic production cut,” analysts at AB Bernstein said. “The cut of 1.2 million barrels per day (bpd) was at the upper end of expectations (0.7-1.2 million bpd). An additional cut of 0.6 million bpd from non-OPEC countries could significantly add to what has been announced by OPEC.”
Following the announcements, the price for Brent crude futures LCOc1, the international benchmark for oil prices, jumped more than 12 percent from below $50 on Wednesday to $52.31 per barrel at 0441 GMT.
The development also triggered frenzied trading, with Brent futures trading volumes for February and March expiry hitting record volumes.
February Brent traded a record 783,000 lots of 1,000 barrels each on Wednesday, easily beating a previous record of just over 600,000 reached in September. March expiry Brent traded 288,64000 lots of 1,000 barrels each, compared with a previous record of 228,7000 lots done in July 2014.
Yet as markets re-opened in Asia on Thursday, some doubts over the cut began to emerge.
“This is an agreement to cap production levels, not export levels,” British bank Barclays said. “The outcome is consistent with… what OPEC production levels were expected to be in 2017 irrespective of the deal reached.”
Meanwhile U.S. bank Morgan Stanley said, “Investor skepticism remains on individual countries’ follow-through (on the cut), which is keeping prices below year-to-date highs (of $53.73 per barrel in October) for now.”
Also, because any cut will only take effect from next year, supplies for the rest of 2016 remain ample.
“Supply in December will increase while demand is expected to decline. This makes the foundations of a strong price advance unstable, if not dangerous,” commodities brokerage Marex Spectron said.
Despite the jump in prices after the deal, they are still only at September-October levels – when plans for a cut were first announced.
Oil prices remain at less than half their mid-2014 levels, when the global glut started, and Goldman Sachs said in a note following the agreement that it expected oil prices to average just $55 per barrel in the first half of next year.
OPEC produces a third of global oil, or around 33.6 million bpd, and the deal it would reduce output by 1.2 million bpd from January 2017. That would take its output to January 2016 levels, when prices fell to over 10-year lows amid ballooning oversupply.
Analysts also said that the cuts would leave the field open for other producers, especially U.S. shale drillers.
“We do not believe that oil prices can sustainably remain above $55 per barrel, with global production responding first and foremost in the U.S.,” Goldman Sachs said.
U.S. crude production has already risen by over 3 percent this year to 8.7 million bpd, as its drillers have aggressively slashed costs.
Consequently, U.S. West Texas Intermediate (WTI) crude futures were weaker than Brent, though edging towards $50, trading at $49.81 per barrel at 0442 GMT. –AFP
Story first published: 1st December 2016