OPEC deal begins this week

OPEC deal begins this week

The Organization of Petroleum Exporting Countries (OPEC) deal goes into effect this week as the start the New Year begins. The oil cartel members are allowed to average their reductions over a six-month period, so immediate cuts are not a given. It will take a few weeks to figure out who is cutting and by how much especially as the data for January will be released in February. The market is taking a wait-and-see approach to the official start of the landmark deal reached by OPEC and several non-OPEC members to reduce their output.

OPEC and non-OPEC producers are expected to lower production by almost 1.8 million barrels per day (bpd), with Saudi Arabia, OPEC’s largest producer, agreeing to bear the lion’s share of the cuts.

Oil prices posted incremental gains on the eve of scheduled OPEC cuts, but had stalled after the EIA reported a surprise uptick in oil inventories. Oil ends the year nearly twice as high as where it started, pointing to a more balanced market in the months ahead.

US benchmark West Texas Intermediate (WTI) crude oil futures settled 16 cents higher at $54.06 a barrel, not far from the year’s high of $54.51 reached on December 12. Brent crude futures ended up 13 cents at $56.22 a barrel. The international benchmark hit $57.89 on December 12, its highest since July 2015.

Oil prices have gained 25 percent since mid-November, helped by expectations for OPEC’s supply cut and solid US economic figures that have also bolstered equity prices.

Oil prices will gradually rise toward $60 per barrel by the end of 2017, a Reuters poll showed with further upside capped by a strong dollar, a likely recovery in US oil output and possible non-compliance by OPEC with agreed cuts.

Brent crude futures will average $56.90 a barrel in 2017, according to analysts and economists polled by Reuters. The current forecast is marginally lower than the $57.01 forecast in the previous survey. However, average Brent prices are expected to improve with each subsequent quarter, starting with $53.67 in the first, to $56.51 in Q2, $58.69 in Q3 and $59.78 in the fourth quarter. Brent has averaged about $45 per barrel so far this year.

“Crude prices should trade most of the time above their 2016 average. A stronger upside potential should become evident especially in the second half when the market fundamentals will record a significant improvement (under the assumption of strong compliance to the OPEC deal),” said Intesa SanPaolo analyst Daniela Corsini.

Jabar Ali al-Luaibi, Iraqi Oil Minister, said his country, which has seen fast production growth in the past two years, would cut supply by 200,000-210,000 bpd from January.

Luaibi said on a visit to fellow OPEC member Kuwait that he saw oil prices rising to $60 per barrel as the cuts would help ease the global glut of the past three years.

Bijan Zanganeh, Iranian oil minister also said he expected OPEC to abide by the deal. “While competing, we do have engagement”.

Venezuela said it will cut 95,000 barrels per day of oil production in fulfillment of a producers’ deal to reduce global output and strengthen prices.

“Without prejudicing its international contractual obligations, from January 1 2017, (state oil company) PDVSA and/or its subsidiaries will implement a reduction in the volumes of its main crude sale contracts, all in conformity with existing terms and conditions,” the Energy Ministry said.

Venezuela, a price hawk within OPEC and one of the countries worst affected by a fall in crude revenue since mid-2014, currently produces just over 2.4 million barrels of crude and condensates per day, according to ministry data.

There are, however, worries that oil speculators already sowing seed of another price downturn. Hedge funds and other money managers have built up such a speculative position on rising oil prices that they risk sparking liquidation if OPEC does not deliver on their promised cuts.

FRANK UZUEGBUNAM

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