Brent oil is headed for its biggest weekly gain since 2009 after OPEC approved its first supply cut in eight years, with attention now shifting to compliance with the deal and how other producers will react to a price rally.
Futures rose in London and New York, and were poised to climb more than 10 percent this week. OPEC’s three largest producers — Saudi Arabia, Iraq and Iran — overcame discord to reach Wednesday’s pact to reduce the group’s output by 1.2 million barrels a day, while Russia pledged a cut of as much as 300,000. The deal will hasten the drop of global stockpiles, OPEC Secretary-General Mohammad Barkindo said in a Bloomberg TV interview Thursday.
The Organization of Petroleum Exporting Countries set a collective output target at the lower end of the range outlined two months ago in Algiers, boosting prices and prompting predictions of a possible advance to $60 a barrel from Goldman Sachs and Morgan Stanley. Yet some analysts warned that the rally may encourage higher output from producers outside the group, including in the U.S. The last time OPEC set a quota, members exceeded it for 20 of the 24 months before the cap was scrapped at the end of 2015.
“They’ve stood up and now have to deliver concrete action sooner than later if they want to maintain these gains,” John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy, said by telephone. “The market’s rightly rewarded them for coming together and will now be seeing if they follow through. The cuts don’t start until January and compliance has always been a problem for the group.”
Brent for February settlement climbed 17 cents to $54.11 a barrel on the London-based ICE Futures Europe exchange at 9:37 a.m. in New York. The January contract expired on Wednesday. Front-month futures, which are up 15 percent this week, are heading for the biggest gain since January 2009. The February contract is up 12 percent this week.
West Texas Intermediate for January delivery rose 5 cents to $51.11 a barrel on the New York Mercantile Exchange. Total volume traded was 52 percent higher than the 100-day average.
Russia’s output cut should be spread proportionally among the country’s producers, who have said they support the move, Energy Minister Alexander Novak told reporters Thursday. State-controlled Rosneft PJSC, the country’s largest producer, is likely to bear most of the burden, according to Renaissance Capital. Russia may announce cuts for each company late next week, said Leonid Fedun, vice president for strategic development at Lukoil.
OPEC’s cuts are intended to shrink the world’s bloated oil stockpiles back to a normal level, paving the way for prices to top $60 a barrel. “Our objective has been since Algiers to stimulate the joint deal with non-OPEC and accelerate the drawdown of stocks,” Barkindo said. “Inventories have continued to weigh down on prices” and all of OPEC wants to see prices higher, he said.
“We saw producers hedge last month when prices topped $50 and I’m sure they’re doing it again,” Kilduff said. “With prices above $45 they can lock in security into next year at the least. This is sure to embolden U.S. shale producers.”
Other oil-market news:
– Russia and Qatar are still discussing the most convenient location for talks between OPEC and non-OPEC producers, with options including Vienna, Doha and Moscow, U.A.E. Oil Minister Suhail Mazrouei said in an interview.
– Kazakhstan will decide on cutting production after OPEC, non-OPEC talks later this month, the nation’s Energy Ministry press service said in a statement.
– BP approved the Mad Dog Phase 2 oil project in the U.S. Gulf of Mexico — the scene of its biggest disaster six years ago — at less than half its original cost.
– Harold Hamm, the billionaire oilman and energy adviser to Donald Trump, says foreign ownership of U.S. refineries is an issue the new administration needs to be concerned about.
Bloomberg’s Rakteem Katakey contributed.