Markets

Oil prices rise in anticipation of tighter 2017 market

Move follows decision by Opec and other producers to cut output to prop up prices

An oil tanker being used as a floating oil storage facility off the coast of Johor in Malaysia. Photograph: Reuters/Henning Gloystein/File Photo

Mon Dec 19 2016 - 15:01

Oil prices rose on Monday in anticipation of tighter crude supply going into 2017 following the decision by Opec and other producers to cut output to prop up prices.

Brent crude futures, the international benchmark for oil prices, were trading at $55.41 per barrel at 8am in London, up 20 cent from their last close. US West Texas Intermediate (WTI) crude oil futures were up 31 cent at $52.21 a barrel. Traders said the higher prices in front-month crude futures were due to expectations of a tighter market.

The Organisation of the Petroleum Exporting Countries (Opec) and other producers led by Russia have announced cutbacks of almost 1.8 million barrels per day (bpd) in oil production from next month in an effort to bolster prices to reduce rampant global overproduction which has seen output outstrip consumption for over two years.

Compliance

“With investors now expecting a relatively high level of compliance with the production-cut agreements, prices should be well supported,” ANZ bank said on Monday.

READ MORE

“Saudi Arabia has stated its willingness to cut production below 10 million bpd if needed [down from around 10.5 million bpd currently], which should limit risk to the deal,” US bank Morgan Stanley said on Monday, adding that some of the non-compliance risk to the deal to cut output in 2017 came from Iraq, which increased its January loadings versus December.

JBC Energy said that “the US dollar easing off mid-week highs contributed to bullish [oil] sentiment”.

The dollar has lost 0.9 per cent against a basket of other leading currencies since hitting 2002 highs last week. Swings in the dollar can affect oil demand as they influence fuel prices for any country using its own currency domestically.

Drilling

Despite this, there were factors that weighed on markets, preventing prices – which remain relatively low – from rising more. In the United States, which did not participate in the production-cut deal, drilling for new oil has increased for seven straight weeks.

Drillers added 12 oil rigs in the week to December 16th, bringing the total to 510, the highest since January, though still below 541 rigs a year ago, energy services firm Baker Hughes said on Friday.

"Since its trough on May 27th, 2016, producers have added 194 oil rigs [+61 per cent] in the US," US bank Goldman Sachs said. As a result, US oil production is edging up, rising from below 8.5 million bpd in July to almost 8.8 million bpd by mid-December. – Reuters

LATEST STORIES