Oil prices extend gains after surge on OPEC output deal

Crude oil prices rose above $50 a barrel on Thursday, extending the big gains made after OPEC and Russia agreed to restrict production, even as analysts warned other producers were likely to top up supply.

The Organization of the Petroleum Exporting Countries agreed on Wednesday to 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.

“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.”

Benchmark Brent crude for February was up $1.36, or 2.6 percent, at $53.20 a barrel by 9:55 a.m. ET (1455 GMT). That is not far from the 2016 high of $53.73 struck in October. On Wednesday, the expired January Brent contract ended up 8.8 percent at $50.47.

U.S. light crude oil rose $1.24, or 2.5 percent, to $50.68 a barrel on the day. It briefly rose about $51 in morning trade. The contract ended Wednesday’s session up 9.3 percent.

Prices remain at less than half their mid-2014 levels, when the global glut started.

“OPEC has delivered an agreement,” said Jason Gammel of U.S. investment bank Jefferies. “For the time being, oil prices have received a huge support.”

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

The March 2017 Brent futures contract traded a record 783,000 lots of 1,000 barrels each on Wednesday, worth $39 billion and beating a previous record of just over 600,000 reached in September. That’s more than eight times daily world crude oil consumption.

Despite the agreed deal, some doubts over the cut remained.
“Scepticism remains on individual countries’ follow-through, which is keeping prices below year-to-date highs (of $53.73 per barrel in October) for now,” Morgan Stanley analysts said.

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, when prices fell to 10-year lows amid ballooning oversupply.
Analysts said 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.