Brent Oil Jumps to Highest in More Than a Year After OPEC Accord

  • Exporter group agrees to reduce production in landmark deal
  • Energy companies are biggest winners in European markets

OPEC Reaches a Deal: What's Next for Oil?

Brent oil climbed to the highest level of 2016 after OPEC approved its first supply cuts in eight years, with the focus now shifting to how strictly the group will implement the deal.

Brent futures advanced 4.1 percent in London. OPEC agreed to reduce collective output by 1.2 million barrels a day to 32.5 million and Russia pledged a cut of 300,000, prompting predictions of a possible crude rally to $60 a barrel from Goldman Sachs Group Inc. and Morgan Stanley. Energy companies led gains in European equity markets.

OPEC’s three largest producers -- Saudi Arabia, Iraq and Iran -- overcame disagreements to reach Wednesday’s deal in a bid to drain record global stockpiles and boost crude prices. Russia committed to cooperate with the group by curbing production next year. After hailing the accord, analysts highlighted the need for producers to comply with their pledges.

"The agreement is quite impressive," said Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts. "The cut is bigger than we expected and they got Iran and Iraq to take part in a way. This will be very bullish for the second half of 2017."

Brent for February settlement climbed $2.10 to $53.94 a barrel on the London-based ICE Futures Europe exchange. It’s the highest close since Aug. 31, 2015. The January Brent contract surged 8.8 percent to expire at $50.47 a barrel on Wednesday.

West Texas Intermediate for January delivery rose $1.62, or 3.3 percent, to settle at $51.06 a barrel on the New York Mercantile Exchange. It’s the highest close since Oct. 19. Total volume traded was about 93 percent above the 100-day average at 2:46 p.m.

Volume, Volatility

Volumes on the two most actively traded crude contracts, Nymex WTI and ICE Brent, both hit records Wednesday.

Oil market volatility, as measured by the Chicago Board Options Exchange Crude Oil Volatility Index, dropped for a second day as the OPEC agreement reverberated. The index dropped 20 percent Wednesday, the most in data going back nine years.

The S&P Oil & Gas Exploration and Production Select Industry index climbed 0.7 percent to the highest level since since July 2015.

"The market’s rising strongly because there was a lot of skepticism about OPEC’s ability to come to an agreement," said Mark Watkins, the Park City, Utah-based regional investment manager for the Private Client Group at U.S. Bank, which oversees $136 billion in assets. "Stockpiles were starting to come down and this will speed that up."

Saudi Arabia, which raised oil production to a record this year, will reduce output by 486,000 barrels a day to 10.058 million a day, an OPEC document shows. Iraq, the group’s second-largest producer, agreed to cut by 210,000 barrels a day from October levels. Iran is the only member allowed to raise production, after claiming special consideration following years of sanctions.

Target Compliance

The last time OPEC had a collective quota, members exceeded it for 20 of the 24 months before the cap was scrapped at the end of 2015.

"We’re moving higher on optimism that the cut, together with expected growth in global demand, will bring the market into balance," said Gene McGillian, manager of market research for Tradition Energy in Stamford, Connecticut. "I can see reaching the 2016 highs near $52 and even pushing above that until we see if they are compliant or the U.S. rig count starts to pick up even more."

Russia will cut output by as much as 300,000 barrels a day from the current level of 11.2 million barrels a day, Energy Minister Alexander Novak said Thursday. Production will decrease gradually in the first half of 2017, he said.

"They don’t have to do much because the market was moving into balance already," Tim Pickering, founder and chief investment officer of Auspice Capital Advisors Ltd. in Calgary, said by telephone. "They want to see prices in the $50 to $60 range, not any higher because that would kick in too much North American competition."

Goldman Sachs forecast an increase in prices to $55 for WTI and $56.50 for Brent, saying full compliance with output targets by OPEC and non-members could add an extra $6 a barrel. If the group sticks to its commitments, oil may trade from $50 to $60, Morgan Stanley said.

Oil-market news:

  • OPEC’s deal will help cut the current global supply surplus of about 300 million barrels, Venezuelan Oil Minister Eulogio del Pino said in a Bloomberg TV interview. This could lift prices to $60 to $70, he said.
  • U.S. crude production rose to 8.7 million a day last week, the highest since June, according to an Energy Information Administration report Wednesday. Stockpiles fell by 884,000 barrels to 488.1 million barrels.
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