Brent jumps past $53 as OPEC deal drives appetite for oil

Published: Dec 1, 2016 9:20 a.m. ET

Deal enforcement in question as OPEC has no authority to make members comply

At the OPEC meeting in Vienna on Wednesday.

Oil prices on Thursday sprang higher by 3%, extending gains made after OPEC struck a long-sought agreement to reduce oil production in an oversupplied market.

Brent crude LCOG7, +3.63% , the global oil benchmark, leapt $1.50, or 2.9%, to $53.34 a barrel on London’s ICE Futures exchange. West Texas Intermediate futures CLF8, +6.66% piled on $1.48, or 3%, to $50.92 a barrel on the New York Mercantile Exchange. The contracts earlier in the session briefly dipped lower.

The agreement struck by representatives of the Organization of the Petroleum Exporting Countries marked the group’s first concerted effort to slash output since 2008 and sent prices surging more than 9% on Wednesday.

The cut, representing about 1% of global production, will help to reduce a supply glut that has depressed prices for more than two years. It involves significant reductions by heavyweights including Saudi Arabia, the group’s most powerful member and de facto leader of the cartel.

“OPEC’s 32.5 million barrels a day production agreement with country level commitments exceeds market expectations,” said Adam Longson, a commodity analyst at Morgan Stanley.

Analysts say the biggest question remains enforcement, as OPEC has no authority to make its members comply. OPEC members have a record of producing beyond their allotted quotas.

OPEC’s production cut deal — can it last?

OPEC agreed to cut its global production by approximately 1% in an effort to lift sagging prices. Here’s a look at the behind-the-scene dealmaking and whether OPEC’s agreement is expected to last.

Under the pact, Saudi Arabia is expected to take the lion’s share of the cuts by slashing production by 486,000 barrels a day. Iraq had a last-minute change of heart by agreeing to curb output by 200,000 barrels a day.

“People are going to be watching closely if the group can now actually live up to their pledges,” says Stuart Ive, a client manager at OM Financial.

The group is expected to reassess the effectiveness of the deal in six months.

“While we acknowledge that OPEC’s track record of delivering on production cuts has historically been poor, on a net basis we expect this to tighten crude markets,” said Scott Darling, the head of Asia-Pacific oil and gas research at J.P. Morgan.

The deal is expected to accelerate the rebalance of supply and demand in the market, which will likely shift to a 500,000-barrel deficit in the first half of next year, Bernstein Research said. It added that the deficit could rise to more than 1 million barrels a day by the second half of next year.

Higher prices, however, are likely to cause more U.S. shale producers to increase production.

The latest production data from the U.S. Energy Information Administration showed U.S. production increased by 9,000 barrels a day to 8.7 million barrels for the week ended Nov. 25.

“There is a real risk that higher prices could reactivate more dormant shale oil,” said ANZ Research, which expects international oil prices to hit strong resistance at around $60 a barrel in early 2017.

Another wild card is the cooperation of non-OPEC producers, which are expected to decrease production by 600,000 barrels a day. Russia said it would cut production by 300,000 barrels a day, though it isn’t clear how much of that will come from already-expected declines.

“In fact, we’re not even fully confident that Russia will freeze production, particularly if the market tempts them with higher prices,” said Tim Evans, a Citi Futures analyst.