Oil rose towards $51 a barrel on Monday before retreating as traders and investors weighed Opec’s pledge to cut output for the first time since the financial crisis against a market that remains awash with crude.
After rising as much as 71 cents to a three-month high of $50.90 a barrel in early trading, Brent, the global crude oil marker, fell back to $50.49 as the US dollar strengthened and traders booked profits. West Texas Intermediate, the US oil benchmark, was trading at $48.54, up 31 cents.
Brent climbed 7 per cent last week after the 14-member Opec production cartel announced the outline of a deal to reduce output by as much as 1m barrels a day.
Ahead of the cartel’s meeting in Algeria, hedge funds and speculators raised their net long position — the difference bets on prices going up versus down — in Brent and WTI by 21m barrels to 471m.
Opinion is sharply divided on the so-called Algiers pact. For many analysts the lack of detail about where the proposed cut will fall raises serious questions about its execution and success in dealing with a persistent oil glut that has caused oil prices to halve since the middle of 2014.
For others the deal is significant because it marks the end of a two-year experiment with market forces in which Opec led by Saudi Arabia, its most influential member, pumped flat out to put pressure on high-cost producers such as US shale drillers.
“The real significance of last week’s framework Opec production agreement is not the size of the implied or actual output cut, but the fact that Saudi Arabia and Opec have returned to active market management,” said Michael Wittner at Société Générale. “It is difficult to overstate the importance of this change.”
As the market waits for Opec to thrash out the details of last week’s agreement to lower output to 32.5m-33m b/d — the cartel hopes to have a binding deal ready for its next formal meeting at the end of November — it remains awash with crude.
Opec’s production is likely to have reached a record level of 33.60m b/d in September, according to a survey by Reuters. Government data released on Monday showed Russia’s oil output had jumped almost 4 per cent in September to 11.11m b/d, a new post-Soviet era high.
Russia, the largest exporter outside Opec, has said that it might consider freezing production in support of a co-ordinated supply cut by the cartel but it has yet to provide further details, making some traders nervous.
A wave of non-Opec supply is also about to hit the market from developments in Russia as well as Kazakhstan and west Africa, according to analysts.
JBC Energy, a Vienna-based energy consultancy, sees monthly gross supply additions reaching 250,000 b/d by the end of the year as supplies from these fields come on stream.
“Needless to say, these new crude flows will have a significant impact on [supply/demand] balances and on prices,” said JBC. “We forecast an October crude surplus of 2m b/d.”
“Assuming no significant action by Opec producers before the end of the year, our … balances suggest an oversupply of 1.2m b/d on average in the fourth quarter.”
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