By and

Published: Sept 30, 2016 3:27 p.m. ET

Oil traders continue to question impact of OPEC preliminary deal

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Algiers deal sows seeds of doubt

Oil futures finished higher Friday, with prices in New York logging a second-straight monthly gain, but suffering from the first quarterly loss of the year.

The Organization of the Petroleum Exporting Countries reached an agreement this week to scale back output to a set range. Traders, however, are forced to wait two months before the deal is ratified and details are released on how the cutbacks in output will be distributed among producers.

November West Texas Intermediate crude CLX6, +0.56%  tacked on 41 cents, or 0.9%, to settle at $48.24 a barrel on the New York Mercantile Exchange. Tracking the front-month contracts, prices fell nearly 0.2% for the quarter, but gained roughly 7.9% for the month.

The November Brent crude contract LCOX6, -0.39%  on London’s ICE Futures exchange, which expired at the settlement, fell 18 cents, or 0.4%, to end at $49.06 a barrel, while the December contract LCOZ6, +0.42% edged up by 38 cents, or 0.8%, to $50.19 a barrel. Brent futures rose more than 1% for the quarter and saw a gain of over 4% for the month.

WTI oil futures have risen more than 7% over the past two sessions after OPEC caught the market off guard by reaching to a preliminary pact to slash the group’s output between 32.5 million barrels a day and 33 million barrels a day, down from the levels of 33.2 million barrels a day in August. A more definitive policy, including production cap for individual members, will be discussed and possibly ratified at OPEC’s next meeting on Nov. 30 in Vienna.

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“OPEC, specifically Saudi Arabia, was successful in jawboning the oil markets higher in recent weeks with the chatter of the meetings in Algiers and of course the ‘agreement’ to implement a production ceiling formally at their next meeting in November,” Tyler Richey, co-editor of The 7:00’s Report told MarketWatch. “It appears the Saudis and the rest of the oil cartel have been taking notes from the world’s central banks on how to move markets without actually taking any action—and it’s working.”

After the initial knee-jerk rally, doubts have settled in as to whether the deal will be implemented. Analysts also expressed concern that cartel members haven’t always been forthcoming about their production levels and haven’t abided by the quota in the past.

“OPEC has no way of enforcing the quotas,” said Jonathan Chan, an energy analyst at Phillip Futures.

The fact that OPEC was able to reach consensus on a production cut was seen as bullish, but analysts were less certain that it would result in supply being brought in line with demand in a market awash with oil.

“OPEC may have reasserted its relevance and shown that it still has the ability to exert influence on the oil market but it has quickly dawned on many that OPEC’s change of strategy may not be a panacea for the global oil glut,” said brokerage PVM.

U.S. shale producers, whose technology enables them to increase oil production quickly, may also swoop in and widen the spigots to capture the higher margins, analysts said.

On Friday, an update from Baker Hughes BHI, +0.84%  showed that the number of active U.S. rigs drilling for oil, which is a proxy for domestic oil activity, rose by 7 to 425. It’s now posted increases in 13 out of the last 14 weeks.

Looking ahead to the fourth quarter, the path of least resistance is “certainly higher,” as the “combination of speculation, short-covering, and momentum will likely carry the oil market higher towards and, potentially, through $50 a barrel, with the next logical upside target being the round $60/barrel level,” said Richey.

But prices aren’t likely to move materially out of the $50s for very long, because the OPEC deal is “not set in stone,” he said. OPEC will also face challenges getting non-OPEC members to cooperate and higher prices may “invite U.S. producers to hedge out and begin tapping into wells that are drilled by uncompleted,” he said.

Back on Nymex, traders saw the expiration of the October contracts for petroleum products. October gasoline RBV6,+1.49%  ended at $1.487 a gallon, up 2.1 cents, or 1.4%. Futures prices saw a quarterly loss of roughly 0.9%. October heating oil HOV6, +1.32%  added 1.8 cents, or 1.2%, to $1.528 a gallon, with futures prices up about 2.9% for the quarter.

—Sara McFarlane contributed to this article.

 

http://www.marketwatch.com/story/oil-prices-continue-to-fall-as-doubts-over-opec-agreement-build-2016-09-30