Oil Prices Continue OPEC Rally
December 05 2016 - 3:17PM
Dow Jones News
By Timothy Puko and Neanda Salvaterra
Oil prices edged up to a fresh one-year high Monday, adding to
last week's sharp rally from OPEC's agreement to cut
production.
The market is extending gains as many analysts raise hopes the
Organization of the Petroleum Exporting Countries is more likely to
abide by this deal than others from years past. Its members are
notorious for exceeding production quotas, but this time severely
bloated stockpiles and the past month's rise in prices may make
them more likely to follow through, analysts said.
"Beside they only must be on their best behavior for a few
months to get the market into a daily supply deficit," Phil Flynn,
senior market analyst at the Price Futures Group in Chicago, said
in a note.
Light, sweet crude for January delivery settled up 11 cents, or
2%, to $51.79 a barrel on the New York Mercantile Exchange. It is
the highest settlement since July 14, 2015.
Crude prices gained almost 15% last week after OPEC agreed to
pull back output by 1.2 million barrels a day. Investors are now
waiting for the outcome of a Dec. 10 meeting between the cartel and
non-OPEC producers such as Russia, which will also focus on
production limits.
Russia has said it is willing to participate in the OPEC deal.
But Moscow has failed to follow through on similar agreements in
the past.
Energy Aspects is assuming Russian production freezes at 11
million barrels a day, just below its current record high. It also
expects OPEC to cut output to 32.8 million barrels a day, within
about 400,000 barrels of the cap the group announced last week. The
London consultancy is forecasting 82% compliance from within the
group, saying Iraq will likely not follow through, but Iran will
peak about 200,000 barrels a day below its quota.
"The market should not assume this is just a six-month deal,"
Amrita Sen, Energy Aspects' chief oil analyst said in a note.
"OPEC's primary goal is to run down the inventory overhang rather
than target higher prices."
Inventories should shrink by 500,000 barrels a day in the first
half of next year because of the agreement, she added. That should
keep prices stable at this higher level until investment cuts from
outside OPEC lead to more shortfalls and even higher prices
starting after 2018, according to Piper Jaffray Cos.' Simmons &
Co. International.
But the bank is capping its price forecast until then at about
$60 a barrel, it said in a note Monday morning. Inventories are
still so high and U.S. shale-drillers could immediately put more
oil on the market to take advantage of the recent rally, capping it
in a new range between $50 and $60 a barrel, the bank said.
But some are still skeptical of the deal, especially the
linchpin of Russian participation. OPEC expects producers from
outside the cartel, including Russia, to join with additional cuts
totaling 600,000 barrels a day.
"I would be surprised to see any significant action on this
side," said Eugen Weinberg, head of commodity research at
Commerzbank AG. "Russia is the ultimate beneficiary of this deal
because not only do they benefit from the higher oil price but also
from the market share they can take from OPEC."
Russia increased its oil production to a record 11.2 million
barrels a day in November.
Since Moscow has indicated that any production cut would be
based on the November level, the country would still be producing
significantly more crude oil in the first half of 2017 than it was
just a few months ago, said Commerzbank in an analyst note.
Gasoline futures lost 0.16 cent, or 0.1%, to $1.5575. Diesel
futures lost 0.1 cent, or 0.1%, to $1.6571 a gallon.
--Benoit Faucon and Georgi Kantchev contributed to this
article.
Write to Timothy Puko at tim.puko@wsj.com and Neanda Salvaterra
at neanda.salvaterra@wsj.com
(END) Dow Jones Newswires
December 05, 2016 15:02 ET (20:02 GMT)
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