More Modest Market Gains Amidst Warning That Oil Prices Will Plummet If Cutback Deal Compliance Is Lacking

Data on Tuesday showed that China's November crude output fell 9 percent to 3.915 million bpd

If nothing else, the production cutback deal ratified by the Organization of the Petroleum Exporting Countries (OPEC), combined with Saturday's announcement that 11 non-members will also slash production, is a success in encouraging modest market gains: West Texas Intermediate on Tuesday settled up 15 cents at $52.98, another 17 month closing high.

Presumably, the market could see more gains on the strength of Abu Dhabi National Oil Company telling customers it will reduce Murban and Upper Zakum crude supplies by 5 percent and Das crude exports by 3 percent, along with Kuwait Petroleum Corporation announcing a similar cut in its January contractual  crude oil supplies – a sign that producers overall are serious about cutting production.

However, PVM analysts said in a note that the market optimism will die and prices will turn quickly if compliance ultimately proves to be lacking: "The following three to six months will provide us with an answer as to whether the foundation is strong enough to hold the building or will it collapse like a house of cards."

And even the International Energy Agency, which in its latest monthly report says the cartel's agreement could trigger a global supply deficit as early as the first half of next year, took note of the  unsettling fact that OPEC and Russia agreed to make the cuts at the same time many members and non-members were pumping at record levels.

The report stated, "As OPEC was deciding to cut production, its crude output in November was 34.2 million barrels per day (bpd), a record high, and 300,000 bpd higher than in October"; this, it warned, poses a challenge to the cartel's plans to slash output to support prices.

Given the volatile state of the market, the IEA seems to be playing it safe by suggesting that all could be rosy next year or head south; meanwhile, data on Tuesday showed that China's November crude output fell 9 percent to 3.915 million bpd compared to the same time last year but recovered from October's 3.78 million bpd, the lowest rate in over seven years.

India's fuel demand rose 12.1 percent in November compared with the same month last year, to 4.07 million bpd.

Gene McGillian, manager of market research at Tradition Energy, earlier this week described the market as "feeding on itself" and said it "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."