Crude Hits 17 Month High, Analysts Say Bigger Gains Could Follow

Tuesday December 13, 2016

A so-called "shock and awe" pledge by Saudi Arabia to cut more output, along with 11 non-Organization of the Petroleum Exporting Countries (OPEC) joining forces with the cartel to trim production by 558,000 barrels per day (bpd) next year, caused oil on Monday to climb to a 17 month high.

Brent rose $1.36 to $55.69 per barrel, the highest close since July 22, 2015, while West Texas Intermediate rose $1.33 to $52.83 – the highest close since July 14, 2015.

Bob Yawger, director of the futures division at Mizuho Securities USA Inc., remarked, "The non-OPEC cut was expected, but nobody foresaw the Saudi statement.

"The market's giving bonus points because the Saudis are willing to do whatever has to be done to balance the market; we wouldn't be up anywhere near as much on the agreement alone."

Khalid Al-Falih, energy minister for the Saudis, said Saturday that "I can tell you with absolute certainty that effective January 1 we're going to cut and cut substantially, to be below the level that we have committed to on November 30," and he added that his kingdom is ready to take production below 10 million bpd.

Michael Lynch, president of Strategic Energy & Economic Research, is taking Al-Falih's word at face value:  "The Saudi statement show's they're really serious; there's little chance that they'll bail if things get difficult.

"It's clear they want to make this work."

Less clear is how high oil could climb in the near future, and Gene McGillian, manager of market research at Tradition Energy, told CNBC that, "Right now the market is kind of feeding on itself."

He added, "The market could push another $1 to $2 up to $55, and Brent could go to about $60, but at that point there are some concerns that are going to start to cap the rally."

As far as Emmanuel Ibe Kachikwu, minister of state for petroleum for Nigeria, is concerned, $60 per barrel is the right price: he told Bloomberg television, "Once you begin to trend past the mid $60s, you're going to have a surplus of shale producers jump back into the market."

As for the prospect of OPEC members cheating on the deal – which Barlcays believes is a distinct possibility based on many factors - Kachikwu said, "There's a difference this time: there's a very voluntary consensus, and everybody was realizing what the overproduction was costing to the market and costing to the national economies."

Meanwhile, U.S. Commodity Futures Trading Commission data shows that U.S. producers' short positions, protecting against a drop in prices, increased to 657,487 futures and options, the most since 2010.

In other words, shale producers are using the post-OPEC rally to hedge their oil price risk for next year and 2018 above $50 a barrel - potentially boosting U.S. output next year.

Even though doubt persists about the deal's efficacy or chances of success, the recent advancements made by OPEC have won over some of the cartel's harshest critics, including John Kilduff, founding partner of Again Capital, who told Bloomberg prior to Saturday's events that "There's a growing consensus that OPEC and non-OPEC countries will succeed in coming to an agreement."