Oil marches higher on Opec optimism as analysts question deal

Output will be reduced to 32.5-33.0 million barrels per day from about 33.5 million

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. Photograph: Ramzi Boudina/Reuters

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. Photograph: Ramzi Boudina/Reuters

 

Oil prices rose nearly 3 per cent on Thursday, extending their rally on optimism over Opec’s first output cut plan in eight years, despite some analysts’ doubts that the reduction would be enough to rebalance a heavily over-supplied market.

The Organisation of the Petroleum Exporting Countries agreed on Wednesday to cut output to 32.5-33.0 million barrels per day (bpd) from about 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 per cent gain on Wednesday, the biggest in a day since April. A steady dollar and weak US stock market also limited some of the upside in oil in early trading.

Inflation fears

The Opec deal led to losses in government bond markets, due to fears of higher inflation though buoyed by some Asian buying and ongoing support from the ECB, Irish bond prices ended largely unchanged.

Share markets initially gained but lost ground later due to renewed fears about the outlook for Deutsche bank.

Brent crude futures were up $1.06, or 2.2 per cent, at $49.75 in European trading. Brent hit a session peak at $49.81, the highest since September 9th, after falling to $47.99 earlier.

US West Texas Intermediate (WTI) crude futures rose $1.20, or 2.6 per cent, to $48.25. WTI hit a one-month high of $48.32, after a session low at $46.60.

Price gains

Opec would have “successfully added $2-$4 to global crude pricing during the next two months despite the fact that the tough details of allocating quotas, assessing a time frame to any production curtailments et cetera have been pushed to the sidelines for now,” said Jim Ritterbusch of Chicago-based oil markets consultancy Ritterbusch & Associates.

Such price gains will spur non-Opec output, particularly US shale oil, analysts warned. The US 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.

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. – Reuters