OPEC Russia oil cut agreement pushes Oil to new highs

OPEC Russia oil cut agreement sends oil prices soaring to the September-October levels. Will the agreement be able to re-balance the oil market? 

1 December, AtoZForex Yesterday, the Organization of the Petroleum Exporting Countries (OPEC) members have reached a consensus regarding the oil cut deal.

OPEC Russia oil cut agreement

The deal between oil cartel OPEC and Russia to produce less have sent the oil prices soaring in record trading volumes on Thursday. Yesterday, the oil bloc decided to reduce output by 1.2m barrels per day. Hence, this will lower its total output to 32.5m per day and it will be effective starting January 2017. The agreed reduction represents approximately 1 percent of global production.

Moreover, the agreement included the group’s first collaboration with non-OPEC member Russia in 15 years. Additionally, On Thursday, Azerbaijan has indicated its interest in joining the talks on cuts. The analysts at AB Bernstein have commented:

“OPEC has agreed to a historic production cut. The cut of 1.2 million barrels per day (bpd) was at the upper end of expectations (0.7-1.2 million bpd). An additional cut of 0.6 million bpd from non-OPEC countries could significantly add to what has been announced by OPEC.”

The Brent crude futures soared as much as 13 percent to $52.10 per barrel at 0806 GMT. US West Texas Intermediate (WTI) crude futures jumped above $50 shortly before dropping to $49.63 a barrel at 0806 GMT. Jason Gammel of U.S. investment bank Jefferies has stated:

“Bulls got as much as could be hoped for…For the time being, oil prices have received a huge support.”

New trading volumes records

The advancement has also caused hyperactive trading, where the trading volumes of Brent futures for February and March reaching the records after the cut will be visible in the market. The second front-months Brent crude futures contract, now March 2017, traded a record 783,000 lots of 1,000 barrels each. This is worth nearly $39 billion, thus beating a previous record of over 600,000 in September.

Brent for delivery in April traded 288,000 lots of 1,000 barrels each. For comparison, the previous record was 228,700 lots in July 2014.

Doubts still exist

In spite of the finalized agreement and OPEC Russia oil cut agreement, market participants still doubt the effectiveness of the cut. British bank Barclays has stated:

“This is an agreement to cap production levels, not export levels. The outcome is consistent with… what OPEC production levels were expected to be in 2017 irrespective of the deal reached.”

Moreover, Morgan Stanley has stated that “skepticism remains on individual countries’ follow-through (on the cut), which is keeping prices below year-to-date highs (of $53.73 per barrel in October) for now.”

Despite the surge in oil prices, they have only reached the levels of September-October.

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