Oil Jumps as OPEC Promises to Restrain Production Through 2018

Updated on
  • Futures in New York climb to the highest level in a week
  • Hedge funds boost net-bullish Brent oil bets to 3-week high
JPMorgan’s Scott Darling discusses the extension of OPEC’s production cuts, and where he sees prices heading.

Investors liked what they heard from OPEC and lifted crude prices to the highest in a week.

Futures climbed 1.7 percent in New York the day after OPEC and allies including Russia extended supply caps through the end of next year. Significant crude producers Libya and Nigeria came in from the cold, for the first time joining in on an accord that previously let them pump at will. Saudi Arabia and Russia agreed to take the lead in nudging other signatories to conform to the self-imposed output limits.

“There is no reason to think that producers will not be compliant,” Bart Melek, head of global commodity strategy at TD Securities in Toronto, said by telephone. “The market should be prepared to see some tightness as 2018 unfolds.”

Saudi Arabia plans to exercise the same level of self discipline in 2018 on oil production as it has this year, Khalid Al-Falih, the kingdom’s energy minister, said on Thursday in Vienna. Russian Energy Minister Alexander Novak said the group will meet every two to three months to analyze the impact of the cuts on global supplies.

“OPEC has done a very good job of telegraphing what their actions are going to be. There’s been less uncertainty about the direction of where they are headed,” Mark Watkins, a Park City, Utah-based regional investment manager at U.S. Bank Wealth Management, which oversees $142 billion in assets, said by telephone. “This more than anything helps provide a much firmer floor on the price of oil.”

To read how energy stocks may be set to shake-off long-felt investor apathy, click here.

The group’s pledge to be “agile and responsive” suggests a reduced risk of unexpected supply increases or excessive withdrawals from storage tanks, according to Goldman Sachs Group Inc.

West Texas Intermediate for January delivery advanced 96 cents to settle at $58.36 a barrel on the New York Mercantile Exchange. Futures ended the week down 1 percent, the biggest weekly loss since early October.

Brent for February settlement climbed $1.10 to end the session at $63.73 on the London-based ICE Futures Europe exchange. The global benchmark crude was at a premium of $5.35 to February WTI.

Big Unknown

The threat of expanding U.S. oil output still hangs over the market. U.S. production may climb by another million barrels a day before the end of 2018 as a result of the deal extension, according to Barclays Plc. There is a “clear upside risk” to crude supplies if prices remain elevated, the bank said. 

UBS Group AG said a further rise in prices would “likely ignite U.S. shale production further given the short lead times.”

The nation pumped 9.68 million barrels a day last week, the highest level in more than three decades, according to Energy Information Administration data. Oil rigs in the U.S. rose by two to 749, the highest level since late September, according to Baker Hughes data Friday.

“The big unknown is that we don’t exactly know what shale producers will do,” Melek said.

Oil-market news:

  • Money managers have increased their bullish ICE Brent crude oil bets by 11,739 net-long positions to 537,979, the most bullish level in three weeks, the weekly ICE Futures Europe data on futures and options show.
  • Thursday’s renewal of OPEC’s production curbs encourages selling of Brent out-of-the-money call options above $70 a barrel and put options below $55 a barrel across 2018 contracts, Societe Generale SA wrote in a report.

— With assistance by Rakteem Katakey, and Ben Sharples

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