Oil Price Steady Around $50 as Majority of OPEC Gains Hold with Rise to $60 in Prospect

on Dec 1, 2016

Oil prices surged by over 8% yesterday following the announcement that OPEC had agreed a landmark deal to cut oil production by 1.2 million barrels, spread between the member countries. Russia has also agreed to a cut in solidarity and it is hoped that with other non-OPEC oil exporters such as Azerbaijan, an addition 600,000 barrels will be reduced from daily output, combining to almost 2% of global supply. The deal was arrived at as a result of a significant compromise by Saudi Arabia on how much of the cut Iran should carry and is the first coordinated oil output reduction in over 8 years.

Crude oil price has dropped back slightly today but has managed to hold onto the large part of yesterday’s gains and is at around $50 a barrel with WTI at $49.24. Brent Crude for February delivery is up at $51.74, with January contract changing hands for $50.47. Many market commentators believe that further confirmation of the non-OPEC 600,000-barrel reduction will push oil prices up to $55 or beyond to $60 by the end of the year and into early next year.

However, there were also words of warning from the likes of Goldman Sachs and other market analysts that markets should not expect oil price to hold at $60 if it reaches that level. Between $55 and $60 will result in renewed investment and activity by producers of more expensive oil, such as U.S. shale producers and North Sea oilfields. Quoted in Bloomberg, Keigo Matsubara, CFO of Mitsui & Co., a Japanese trading house with investments in the U.S. shale industry, stated:

_“Oil could go up to $60, but then the shale drillers come out and the price will likely come back down. Oil can’t continue over $50.”_
**Gold price** came under new pressure yesterday and not only from rising oil prices. The market has now fully priced in December interest rate hikes and the USD has strengthened further as a result. The appointment of the experienced Steve Mnuchin as U.S. Treasury secretary further increased market confidence and subsequent risk-on sentiment. Mnuchin is expected to provide a buffer to Trump’s presidency resulting in severe protectionist moves that would be expected to harm growth.
The most active contract on the US metals exchange Comex is gold for February delivery, which dropped to its lowest level since February last year, at $1,163.80 0z. In London today, gold’s Spot price did improve 0.25 percent to $1,175.36 an ounce as the dollar eased slightly. Silver, platinum and palladium are also up 0.5%, 0.6% and 0.8%, respectively.
Base metals are up today after a correction over the past couple of days, boosted by oil prices rises and PMI data out of China surpassing expectations. Three month prices for copper were up 0.4%, the same for tin and lead and zinc both added 1.9%, with nickel gaining 0.7% and aluminium 0.6%.

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