Oil marches higher on OPEC optimism; analysts question deal

By: | Published: September 29, 2016 10:28 PM

Oil prices rose nearly 2 percent on Thursday, extending their rally on optimism over OPEC's first output cut plan in eight years.

Oil prices rose nearly 2 percent on Thursday, extending their rally on optimism over OPEC's first output cut plan in eight years. (Reuters)Oil prices rose nearly 2 percent on Thursday, extending their rally on optimism over OPEC’s first output cut plan in eight years. (Reuters)

Oil prices rose nearly 2 percent on Thursday, extending their rally on optimism over OPEC’s first output cut plan in eight years, although analysts questioned if the reduction will be enough to rebalance a heavily over-supplied market.

The Organization of the Petroleum Exporting Countries agreed on Wednesday to cut output to 32.5-33.0 million barrels per day (bpd) from around 33.5 million bpd, estimated by Reuters to be the output level in August.

OPEC said other details of the plan will be known at its policy meeting in November, leaving unanswered when the agreement will come into effect, what new quotas for member countries will be and for what periods, and how compliance will be verified.

Earlier in the day, oil was down, with crude futures retreating from their 6-percent gain on Wednesday, the biggest in a day since April. A steady dollar and weak U.S. stock market also limited some of the upside in oil in early trading.

Brent crude futures were up 80 cents, or 1.6 percent, at $49.49 by 11:48 a.m. EDT (1548 GMT). Brent hit a session peak at $49.50, the highest since Sept. 9, after falling to $47.99 earlier.

U.S. West Texas Intermediate (WTI) crude futures rose 85 cents, or 1.8 percent, to $47.90. WTI hit a one-month high of $48.02, after a session low at $46.60.

The OPEC plan will remove around 700,000 bpd, but the global crude oversupply is estimated at between 1.0-1.5 million bpd, analysts said.

If crude prices continue to rise till November, they could feed a surge in non-OPEC output, particularly U.S. shale oil, analysts said. The U.S. oil drilling rig count has risen in 12 of the 13 past weeks.

“If this proposed cut is strictly enforced and supports prices, we would expect it to prove self defeating medium-term with a large drilling response around the world,” analysts at Goldman Sachs said in a note, citing a 1987 OPEC cut that led to surge in worldwide oil rigs.

Goldman said if the OPEC curbs announced were carried out to plan, they could be result in price appreciation $7-10 per barrel by the first half of 2017. “We reiterate our year-end $43 and 2017 $53 forecasts,” it added.

“We think that OPEC is running a dangerous game if the aim is to push the crude oil price higher from here in the short term,” said Bjarne Schieldrop, chief commodity analyst at Nordic bank SEB.

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