Crude jumps after producers outside OPEC agree to scale back


Oil prices surged Monday after more oil-producing nations agreed to slash production, a move aimed at pushing the oversupplied oil market into balance, or even a deficit, to prop up a crude market that had been stuck in a two-year slump.

U.S. crude futures rose $1.33, or 2.58%, to $52.83 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, gained $1.36, or 2.5%, to $55.69 a barrel on London’s ICE Futures Exchange.

Over the weekend, a group of big oil producers outside of the Organization of the Petroleum Exporting Countries, including Russia, agreed to scale back their output by 558,000 barrels a day. That is on top of the cut of 1.2 million barrels a day agreed to by OPEC in late November. The total reduction represents almost 2% of the global supply.

The deal is viewed as a feather in the cap for Saudi Arabia, the oil cartel’s de facto leader and the world’s top exporter of crude. The market got an extra boost of confidence on reports that Saudi Arabia indicated that, if necessary, the kingdom may be willing to take a deeper cut than the 486,000-barrel cut it had agreed in the November meeting.

“It’s very important that they all got together,” said Shawn Reynolds, portfolio manager with the VanEck Global Hard Assets Fund. “I can’t remember the last time I’ve seen such sense of urgency” from OPEC, he said, pointing to “the dramatic reversal in Saudi Arabia’s stance.”

The non-OPEC cuts, if carried out as described over the first half of 2017, would represent an unprecedented level of cooperation among oil-producing countries that have been groping for ways to lift oil prices out of a two-year funk.

The bulk of the cuts—300,000 barrels a day—have been pledged by Russia, which produces more crude oil than any other country. Other output reductions are promised by 10 other countries, including Oman, Azerbaijan and Sudan.

“This is truly a historic event,” Russian Energy Minister Alexander Novak said. “It is the first time that so many oil-producing countries from different parts of the world have gathered in one room to accomplish what we have done.”

The deal helped breathe new life into an oil rally that had started to sputter last week. West Texas Intermediate, the U.S. benchmark, climbed to $54.51 in overnight trading before pulling back. Crude prices are at their highest level since July 2015.

“It definitely jumped the markets, there’s no doubt about that,” saidMark Waggoner, president of Excel Futures said of the deal between major producers inside and outside of OPEC. “I think it was a bit of a knee-jerk reaction.”

Bernstein Research noted that some of the non-OPEC supply cuts would come from natural decline but that most would come from self-imposed cuts.

Analysts also warned that compliance by the all of the parties remains a glaring downside risk, given these oil producers haven’t always been forthcoming about their production levels, despite their pledges to rein in output.

The production-cut deal will take effect Jan. 1, and the oil producers will reconvene in six months to assess the deal.

“At this stage, the safe assumption is that they will be [compliant], especially, in the first few months,” said Ric Spooner, chief market analyst at CMC Markets.

Another concern is how fast the U.S. shale producers will ramp up their production in a bid to benefit from the higher prices. SEB Markets analysts noted in a report that the number of oil rigs operating in the U.S. jumped by 21 last week—the biggest one week gain since July 2015, the analysts said.

“Our main concern is that market has become comfortably numb in relation to rising rig counts,” said Bjarne Schieldrop, chief commodities analyst at SEB Markets.

“We won’t really see any physical supply response from the added rigs before the second half of 2017. I think this is setting in motion a new boom-and-bust cycle with a big rise in oil rigs,” said Mr. Schieldrop.

Gasoline futures rose 3.57 cents, or 2.37%, to $1.5430 a gallon. Diesel futures rose 3.43 cents, or 2.09%, to $1.6717 a gallon.

Written by Neandra Salvaterra, Jenny W. Hsu and Alison Sider

Source: http://roselandoilandgas.com/oil-surges-as-more-producers-join-output-cuts/