Oil Prices Holding 1-Year Highs on Tuesday Despite November Supply Rise

on Dec 13, 2016

Monday’s renewed oil price rally, which saw prices for brent crude and WTI surge by over 4% on news that 11 major non-OPEC oil producing nations, unofficially led by Russia, had agreed to make supply cuts of 558,000 bpd in solidarity with OPEC’s 1.2 million bpd-cut commitment, has held through to today. The total commitments between the 2 groups amount to a supply cut of around 2% of global output and the hope is that this will rebalance the oil supply glut and keep prices up over 2017. Prices have consolidated near the 1-year high set yesterday and brent crude futures have gained 0.7% today to $56.07 on London’s ICE exchange. In New York, WTI has also added 0.5% on the Mercantile Futures Exchange, to $53.08 a barrel.

The historic pact, the first between OPEC and non-OPEC members in 15 years, will take effect as of January 1st 2017. The cuts will be made in phases with a reconvening of participants in June to assess progress. While there are concerns over the historic unreliability of commitments to cut supply being kept by oil producing nations, Saudi Arabia has already stated that they will make significant cuts to ensure that output falls above target and there is no doubt as to their fulfillment. This has been received by markets as a positive lead and has given rise to some optimism that this time might be different and that there is a real desire by producers to put a floor under oil prices.

There is still a danger that the efforts of OPEC and the deals other partners could be undermined by, particularly, U.S. shale producers who are expected to crank up production if prices look like holding around or above $55 a barrel over the first half of 2017. A further concern is whether the proposed cuts will prove to be enough to rebalance supply with data showing that global output rose to 98.2 million bpd in November. Cuts will be made from December output levels, which, if too high would not result in the intended deficit. However, BMI Research, as quoted by The Wall Street Journal, believes that even non-perfect compliance should result in a supply deficit that would help to push oil prices to between $60 and $70 in the first half of 2017. The analysts also note, however, the higher the price per barrel rises, the greater the temptation will become for producers to break supply quotas.

Moving over to gold price, it also showed a marginal gain yesterday after touching a 9-month low intraday as the U.S. dollar and Treasury bond yields weakened slightly. The supposed explanation is slight re-positioning by the market ahead of tomorrow’s Fed statement on interest rate rises. A 0.25% hike has been completely priced in by markets but there is some lingering doubt as to whether the cautious Fed will match currently hawkish market sentiment for 2017 with the projected pace of additional hikes over the next year. In London today, the spot gold price has eased down by 0.1% to $1,161.72.
In base metals, copper price is down 0.2% to $5,751 a tonne on the London Metals Exchange today with lead and zinc also both down by 0.5% each. Tin and nickel prices are up 0.7% and aluminium 0.2% in a mixed day.

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