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Oil prices rise on expectation of OPEC compliance

Doubts still lingering on the margins as some players don't necessarily always play by the rules.

By
Daniel J. Graeber
Crude oil prices move higher after midweek declines as sentiment builds that OPEC will make good on its word. File photo by Monika Graff/UPI
Crude oil prices move higher after midweek declines as sentiment builds that OPEC will make good on its word. File photo by Monika Graff/UPI | License Photo

NEW YORK, Dec. 16 (UPI) -- Crude oil prices rebounded from midweek declines to regain traction as sentiment emerged that an OPEC agreement to cut production would be honored.

The Organization of Petroleum Exporting Countries agreed to a cap in production of about 32.5 million barrels per day starting in January. The deal amounts to a cut and relies heavily on non-member states to stick.

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The deal is designed to bring an oversupplied oil market back into balance as cuts amount to about what OPEC expects in terms of demand growth. Crude oil prices dropped midweek after OPEC said it expected balance to return during the second half of next year, much later than the first-half balance forecast earlier in the week by the International Energy Agency.

Russia was among the non-member states pressing for some sort of production arrangement and the deal hinges in part on its agreement to cut production. Russian Energy Minister Alexander Novak said oil companies there supported the deal and would work bimonthly to monitor compliance.

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The price for Brent crude oil was up 1.5 percent to start the day Friday at $54.82 per barrel. West Texas Intermediate, the U.S. benchmark price for oil, was up 1.1 percent to open the day in New York at $51.47 per barrel.

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A research note from Bank of America-Merrill Lynch said non-OPEC supply declines this year and next, compared with historic trends for moderate expansion. U.S. shale oil players are showing life as crude oil prices hold above $50 per barrel, though the report said output levels out in early 2017 everywhere but in parts of Texas.

"OPEC agreed to cut crude oil output by 1.2 million barrels per day with key non-OPEC producers indicating a 558,000 bpd curb, a first since 2001," the report said. "Country quotas and an independent production monitoring committee are also part of the deal, so we expect firmer compliance."

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Markets were spooked this week after the U.S. Federal Reserve took a hawkish stance on interest rate policies, driving the value of the U.S. dollar higher and oil prices lower. Supply-side pressures emerged, meanwhile, as Libya could add more barrels to the market soon. Libya is exempt from the OPEC production deal.

Michael Wittner, the global head of oil research at Societe Generale, said the sentiments of compliance in the production agreement were premature. Russia, he said, is the most important player in the deal, but has a poor track record as it never before cut production.

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"As a result, we are extremely skeptical about Russian oil production cuts," he said.

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