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OPEC’s output deal

Christmas, quite literally, came early this year. Not since mid-2015 have oil prices been this high; the increase an immediate consequence of OPEC striking a much-anticipated deal to cut production.

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Our cup almost runneth over with further news that external producers are thinking of joining the self-imposed production diet. “Participating non-OPEC countries for the first time,” said OPEC’s General Secretary Mohammad Barkino, “are committed to a joint agreement for production adjustment.” Bahrain, Kazakhstan, Azerbaijan and Russia are all expected to sign up to cut 600,000 bpd. Add that to the more than 1m bpd cut agreed by OPEC and you can see why the markets are positively giddy.

On Monday, brent crude hit $55.33/b; WTI went up to $52.05/b. As the FT says, these are good times indeed: “Both markers had big seven-day gains last week. For Brent it was the most pronounced since the financial crisis and for West Texas Intermediate the largest since February 2011.”

But has OPEC slit its own throat in this gesture of goodwill to all men? Tim Evans, energy futures specialist with Citigroup told Reuters that, “We remain skeptical the non-OPEC producers will line up to pledge their own reductions when OPEC’s announcement last week already took responsibility for rebalancing the market. In our view the rally in prices represents an economic call for more production, not more cuts.”

And wouldn’t you know it – on Friday, US drilling rigs increased.

Some caution has been sounded from Continental Resources’s chief executive Harold Hamm, who told CNBC, “We have the ability to oversupply the market. The key is not to.” That sentiment was echoed by Carl Larry from Frost & Sullivan Consultants who told the news agency AFP, “We’ll see an increase at a slower pace. I think producers will be very, very careful not to go too far too fast.”

There’s uncertainty among traders about how long the bonhomie will last. According to The Wall Street Journal Price Futures Group senior market analysts Phil Flynn believes “they only must be on their best behaviour for a few months to get the market into a daily supply deficit.” However Energy Aspects’ chief oil analysts Amrita Sen warned “the market should not assume this is just a six-month deal. OPEC’s primary goal is to run down the inventory overhang rather than target higher prices.”

Doing just that is Saudi Arabia, who truly hasn’t gone all misty-eyed and sentimental by delivering this deal. Not one bit. In fact on Monday it announced it was reducing the price of its oil to Asia, a move deliberately designed to ensure it holds market share and encourages purchases. Prior to the deal buyers there had made clear their reluctance to pay more for their fuel, and their lack of reluctance about finding new – cheaper – suppliers. Eiichiro Kitahara, Executive Officer at TonenGeneral Sekiyu told Reuters, “For us the current price levels look to be appropriate for both sides. Our company aims to avoid depending highly on certain suppliers and we may seek new opportunities.”

It may be Christmas, but no-one’s playing a fool. Enjoy it while it lasts folks!