Oil Prices Rise on OPEC Deal
September 28 2016 - 11:20PM
Dow Jones News
Crude oil prices rose in early Asia trade Thursday after the
Organization of the Petroleum Exporting Countries surprised the
market by agreeing to a framework to cut production.
The group proposed cutting its collective output to between 32.5
million barrels a day and 33 million barrels a day, down from
August levels of 33.2 million barrels a day, national oil ministers
said.
The move is a turnaround from the cartel's "market-share first"
tactic that it has adopted for over two years, signaling perhaps
that even large producers are feeling the pain from the prolonged
low prices.
However, the minor gains seen in Asia reflect intense skepticism
in the market on OPEC's commitment to realizing the plan.
On the New York Mercantile Exchange, light, sweet crude futures
for delivery in November traded at $47.15 a barrel at 0050 GMT, up
$0.10 in the Globex electronic session. November Brent crude on
London's ICE Futures exchange rose $0.03 to $48.72 a barrel.
Prices surged more than 5% overnight to their biggest gains in
five months following news that the 14-member bloc agreed at a
meeting Wednesday in Algeria that a production cut is necessary to
buoy oil prices, which have been weighed down by a persistent glut.
The group will wait until Nov. 30 to complete the decision.
The cartel hasn't taken action to freeze or cut its production
since prices started falling in mid-2014. Talks in April fell apart
when Iran refused to participate.
"This should remove the systematic risks in the global banking
system with leveraged loans to oil exporting countries and upstream
oil producers," said Gordon Kwan, head of oil and gas research at
Nomura. The move will also eliminate risk of further devaluation of
the currencies of the Middle East countries.
But skepticism on the effectiveness of the new policy continues
to shroud the market. Goldman Sachs noted that pushing up the
prices via a production cut among the low-cost producer is
"self-defeating" because it would it would provide more incentive
for oil drillers around the world to return to the oil patches.
Moreover, it would leave the low-cost producers with only one
choice to increase revenue: volume growth.
"The jury is still out whether OPEC will take any real actions,"
said Ben Le Brun, an analyst at OptionsXpress, saying the global
oil markets will face high uncertainty leading up to the late
November meeting as OPEC members will battle over who will be
exempt from the deal, and who should take steeper cuts.
For example, Iran, Libya, Nigeria may fight to postpone cutting
their production until their output regains their peak levels.
"In any case, this is still kicking the can down the road to the
formal OPEC meeting on Nov. 30, where individual country quotas
might be decided," said Citi Research in a note.
Nymex reformulated gasoline blendstock for October—the benchmark
gasoline contract—rose 60 points to $1.4837 a gallon, while October
diesel traded at $1.4960, 50 points higher.
ICE gas oil for October changed hands at $436.75 a metric ton,
up $20.75 from Wednesday's settlement.
Tagline to Benoit Faucon, Georgi Kantchev, and Selina Williams
in Algiers contributed to this article.
Write to Jenny W. Hsu at jenny.hsu@wsj.com
(END) Dow Jones Newswires
September 28, 2016 23:05 ET (03:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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