Oil spikes further on OPEC deal as Brent crude charges to 16-month peak

PUBLISHED : Friday, 02 December, 2016, 1:31am
UPDATED : Friday, 02 December, 2016, 1:31am

Oil prices rose more than 4 per cent on Thursday, with Brent crude at its highest in about 16 months, extending gains after OPEC and Russia agreed to restrict output to speed up the rebalancing of a long-oversupplied market.

The Organization of Petroleum Exporting Countries 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. On Thursday, Azerbaijan said it was also willing to engage in talks on cuts.

Despite the historic deal, doubts were widespread in the market.

“It remains to be seen how well they stick to the plan, but if OPEC hadn’t come to an agreement the probability is that oil prices would have fallen to US$40 a barrel, perhaps even lower,” said Simon Flowers, chief analyst at consultancy Wood Mackenzie.

“Brent was trading at about $50 a barrel after the announcement, and we expect it to trade at an average of $55-$60 per barrel in 2017.”

Benchmark Brent futures for February delivery jumped as much as 4.8 per cent to $54.36 a barrel, the highest since July 30, 2015. US crude rose $1.98, or 4 per cent, to $51.42, after rising to a high of $51.72 a barrel, about 20 cents below its 2016 high.

Energy stocks lift Hong Kong, China markets after OPEC oil production cut agreed

US refined products also rose along with crude - ultra low sulfur diesel (ULSD) futures soared as much as 5.5 per cent to its highest in more than a year while gasoline futures jumped about 6 per cent.

The OPEC deal also triggered frenzied trading, with Brent futures trading volumes for February and March - when the supply cuts should start to be visible in the market - hitting record volumes.

The Intercontinental Exchange also said ICE Brent crude futures hit a daily volume record of 1.96 million contracts on Wednesday.

Oil prices are still only at September-October levels - when plans for a cut were first announced - and crude prices are less than half mid-2014 levels, when the oil price began to collapse to its lowest in a generation.

OPEC produces a third of global oil, or around 33.6 million bpd, and the deal aims to reduce output by 1.2 million bpd from January 2017, similar to January 2016 levels.

“It’s clearly too soon to know what beyond the short-term market gain will be the consequences of this mini-renaissance of OPEC - for other producers and for the group itself,” Credit Suisse analysts said.

Others noted that the cuts could leave the field open for other producers, especially US. 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 US,” Goldman Sachs said.

The head of the International Energy Agency Fatih Birol warned of greater volatility after the OPEC deal.

“Unlike in the past OPEC decisions, if prices move to around $60, a substantial amount of oil in the United States is ready to come to the markets,” Birol said.

Coinciding with the OPEC cuts, supply of the four major North Sea grades of crude oil will hit a one-year high next month, according to monthly loading programmes.