Following OPEC’s deal to cut production, oil futures continued to advance on positive sentiment, but gains slowed significantly on the back of profit taking and concerns that quotas would be exceeded.
At the OPEC meeting on Wednesday, delegates confirmed that the organisation would aim to cut output by 1.2mn bpd to 32.5mn bpd from January 2017 for an initial period of 6 months, which could be extended.
OPEC will also look to conclude a deal with non-OPEC producers to cut output by a further 0.6mn bpd and Russia confirmed that it was willing to make cuts of up to 0.3mn bpd in a gradual fashion.
One of the key elements in the OPEC deal was concessions made by Saudi Arabia with a larger than expected reduction in their own output level and a dropping of demands that Iran should cut its own production levels. Hopes for improved relations helped underpin confidence in crude markets.
Overall sentiment remained very strong late in the US session on Wednesday, although there was selling interest on approach to the $50.00 p/b level.
Prices maintained a strong tone in Asia and early Europe with WTI breaking above the $50.00 p/b level for the first time in over a month. Crucially, there were no signs of dissent within OPEC members, which underpinned confidence.
Ahead of the New York open, January WTI futures traded around $50.20 with February Brent futures just above $52.70.
There were still underlying concerns that quotas will be exceeded, especially given that November OPEC production was over 34.0mn bpd. Expectations that quotas would be exceeded were important in keeping crude prices below the third-quarter peaks.
There is also the risk of tensions within the Saudi government as there will be some opposition to the agreement and internal divisions are liable to escalate.
Dollar trends will be watched closely and oil will find it more difficult to advance further if the US currency strengthens further. A sharp dollar correction could support crude, although the correlations remain highly uncertain in the current environment.
Commentary from OPEC and non-OPEC members will continue to be monitored closely in the short term with the potential for further volatility in prices.
Oil Futures Daily Chart