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HomeMarketsOpec rally sends oil to $55

Opec rally sends oil to $55

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Oil rose to its highest level since mid-2015, topping $55 a barrel, as traders bet on supplies tightening after Opec struck a deal last week to cut production for the first time in eight years.

The 13-member cartel has now invited producers from outside the cartel to Vienna this week, as it looks to secure their backing in cutting output. Opec expects countries such as Russia, Kazakhstan, Azerbaijan and Bahrain to cut about 600,000 barrels a day on top of the more than 1m b/d of supply reductions already agreed by the cartel.

Mohammad Barkindo, Opec’s secretary-general, told a conference in New Delhi on Monday these countries have “declared their resolve” in helping Opec rebalance supply and demand. “Participating non-Opec countries, for the first time, are committed to a joint agreement for production adjustment,” he said.

Brent crude, the global benchmark, increased to a high of $55.33 a barrel on Monday before easing to $55.07 — up 61 cents on the day. West Texas Intermediate, the US marker, rose 38 cents to $52.05 a barrel after hitting an earlier high of $52.42.

Both markers had big seven-day gains last week. For Brent, it was the most pronounced since the financial crisis and for WTI the largest since February 2011.

Should oil producers deliver with cuts “the oil market will no longer be oversupplied in the first half of 2017 — and in fact is even likely to show a deficit,” said Carsten Fritsch at Commerzbank. “The market is apparently convinced that Opec will follow its words with action.”

The Opec supply deal has not only lifted oil prices in the short term but has also changed the shape of the crude oil forward price curve. The whole curve is no longer in contango — where prices for future delivery are higher than spot prices — but the back-end has flipped into the opposite state of backwardation.

At the front end of the curve, prices are up more than 16 per cent since last week’s Opec meeting, while those for December 2017 have increased 11 per cent and 8 per cent for December 2018.

Analysts at Barclays say producer companies are rushing to lock in profits through hedging which for US shale companies could mean more rigs drilling for oil and greater levels of production. The current price moves have been “supported by the view that shale would begin to ramp back up again, potentially adding unnecessary supply,” they said.

The prospect of an Opec deal had given speculators a reason to increase bets on higher oil prices. In the run-up to last week’s meeting, hedge funds increased their net long positions in Brent oil futures and options by 17,859 contracts to 310,623, according to data from the Intercontinental Exchange.

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