Non-OPEC output cut agreement sends oil surging
AP Photo/Alexander Zemlianichenko
Main page Economics, Oil

Oil touched $57 for the first time since July 2015 after the biggest non-OPEC producers had agreed to curb the oil production levels and complete their side of the "historic" OPEC agreement.

The largest non-OPEC oil producers such as Russia, Mexico, Kazakhstan, Oman and Azerbaijan gave yet another reason for the oil market to celebrate as they came up with a proposal to cut their individual oil production volumes in a response to the November 30 agreement. Not only was it an important milestone of the complicated negotiations, it was reportedly the first meaningful agreement between the OPEC bloc and major non-OPEC producers since 2001.

OPEC finally reaches an agreement on oil output

According to the meeting of non-OPEC nations last Saturday, 11 oil producers agreed to trim their production levels by a total of 558,000 barrels per day starting this January. The biggest part of the cut, about 300,000 barrels per day, was promised to be on Russia, as the largest producer outside of the OPEC bloc. The rest of the bulk comes from 10 smaller producers like Oman, Azerbaijan, Kazakhstan and others. Even though the deal has already been named a "game changer", the amount of the production volumes suggested to be removed is still lower than 600,000 barrels per day initially expected by OPEC. Still, this was the biggest contribution of non-OPEC oil producers ever, say the experts.

“This is truly a historic event. 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,” said Russia's Energy Minister Alexander Novak, as reported by the Wall Street Journal.

As a result, the oil prices got the biggest boost in the last two years and started slowly climbing back to the psychologically important level of $60 per barrel. The Guardian reported that oil prices jumped to their 17-month high in hours after the agreement between non-OPEC producers was reached on Saturday. Early this morning, Brent crude (NYMEX: XBR/USD) was up more than 5% to $57.04 at the Asian open, the highest since July 2015. West Texas Intermediate futures (NYMEX: XTI/USD) were also up to slightly above $54 per barrel.

If the growth is sustained, WTI could soon reach $56.60, its last support level before the major breakdown in summer 2015, explained Forex analyst Fawad Razaqzada. Likewise, for Brent, the next objective would be a jump to $60 per barrel, which the experts call "psychologically-important" as it marks the benchmark's breakthrough. For Brent crude, the last support point before the slip was at the price of $63. Ever since OPEC announced that it was ready to curtail the oil production, Brent crude has gained 22%, reports Bloomberg.

The war is over

The fact that non-OPEC members and Russia, in particular, have managed to put forward a supporting deal marks an end to the neverending market war between the producers that aggravated the oversupply problem and triggered a devastating 75% drop in oil prices in the last two years. At the moment, the collective effort to decrease the global oil production would potentially remove about 1.75 million barrels of oil from the market, which accounts for about 2% of the total output.

"With 1.758 million barrels expected to be slashed out of the market, or about 2% of the global oil supply starting January 1, oil prices have more room to rally with Brent potentially crossing above $60 in the next couple of weeks," a Market Strategist Hussein Sayed told the Guardian.

However, the problem of compliance is still there. Morgan Stanley (Milan Stock Exchange: Mediaset [MS]) said the deal was likely to favor bullish sentiment in the market but only if all producers actually do what they had promised. Among the non-OPEC producers, Russia has a particularly bad track record of following the similar agreements, say the experts. For example, back in 2001, when the oil producing countries sought to limit the volumes, Russia had promised to cut its output by 50,000 barrels per day before breaking the agreement three months later. Similarly, Russia's second oil production cut attempt in 2008 was also unsuccessful and lasted only about seven months, said Germany's Die Welt editor Holger Zschaepitz.

“OPEC is playing Wall Street very well. The Russians have a completely horrible track record of abiding by these type of agreements. OPEC will be lucky if you see two-thirds of this agreement honored. I’m highly skeptical that the Saudis are going to play nice and cede further market control to the Iranians,” an analyst Stephen Schork told Bloomberg.

Too soon to celebrate (again)

That is why, regardless of how promising the agreement between OPEC and other producers is, the danger of individual countries breaking the rules could stand in the way of the oil prices growing further. The oil producers that are participating in the agreement account for about 60% of the total global oil output whereas such important producers as China, Norway, the U.S. and Canada are not bound by the production cuts.

And, considering that the United States and Canada are the two countries that have largely benefitted from the shale production boom, this is yet another problem that could undermine the success of the "historical" OPEC agreement. Some analysts are worried that the oil price might not rise any further, as the American oil industry is not participating in the cuts. And, if WTI passes the level of $60, the U.S. oil giants are likely to ramp up the production only further.

"The market’s focus will then switch to compliance with the agreement, and U.S. shale producers who are not a part of the agreement. U.S. rig counts rose by 21 last week to 498, the biggest increase since mid-2015, and the questions now becomes how fast will US shale ramp up production and at what level is it possible to cap the current rally?," continued Hussein Sayed.

Goldman Sachs (TOCOM: Futures On Gasoline Feb 2017 [GS]) said in a report, discussed by Bloomberg earlier today, that while the oil prices may get a significant boost and reach $60 per barrel, in case all nations keep the promise, a rebound in American shale production could drag the prices down again. The bank forecasted the oil price of $55 per barrel in the first six months of 2017, emphasizing the limited effect of the OPEC production cut agreement.

Considering that WTI is already nearing $55, the chances of the U.S. producers raising their output are getting even higher.

OPEC sends the stock market in euphoria
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