OPEC decision on output cuts leaves questions, but still optimistic

The oil market erupted as news emerged that OPEC states had actually reached an agreement on an output cap to back the prices.

The crude prices rose by 13 percent, smashing trading volume records, after the Cartel and Russia agreed to reduce output to end the oil supply glut, but after the details emerged, the analysts warned the prices could remain modest as other producers can fill the gap.

By the morning December 1, the price for Brent crude futures LCOc1, the international benchmark for oil prices, jumped 13 percent from below $50 on November to $52.54 per barrel. U.S. West Texas Intermediate (WTI) crude futures also rose back above $50, trading at $50.11 a barrel, Reuters reported.

The Cartel agreed on November 30 on its first oil output reduction since 2008 after Saudi Arabia accepted the deal, which also coordinated action with non-OPEC member Russia.

Bulk of the reduction would come from Saudi Arabia, which would account for 486,000 bpd, while Iranian output will rise by 90,000 bpd with the Islamic republic consenting to keeping its production level below its stated ambition of 4m bpd.

Saudi Arabia is taking the biggest hit, contributing around 0.5 million barrels a day by cutting its output to 10.06 million barrels, says Reuters, while Iran is set to freeze its production close to its current levels of 3.797 barrels a day.

The United Arab Emirates and Kuwait will reduce output by 139,000 barrels a day and 131,000 a day, respectively, the document shows. Non-member Russia, also pumping at a post-Soviet record, will cut by as much as 300,000 barrels a day “conditional on its technical abilities,” Bloomberg reports citing Energy Minister Alexander Novak.

"OPEC has delivered an agreement," Jason Gammel of U.S. investment bank Jefferies said. "Bulls got as much as could be hoped for...For the time being, oil prices have received a huge support."

OPEC produces a third of global oil, or around 33.6 million bpd, and the deal aims to reduce output by 1.2 million bpd from January 2017, similar to January 2016 levels, when prices fell to over 10-year lows.

Although the long-awaited deal was reached, some doubts over the cut still remains.

The deal is an agreement to cap production levels, not export levels which can still imply oversupply. The cuts would leave the field open for other producers, especially U.S. shale drillers.

Moreover, the prices are still only at September-October levels - when plans for a cut were first announced - and prices are at less than half their mid-2014 levels, when the global glut started.

The deal is “transient” in nature, dependent on a posterior agreement to be reached with non-OPEC members on December 9 to cut their own production by up to 600,000 barrels per day.

If successfully finalized, the OPEC deal would result in an overall reduction in the Cartel’s output of about 1.2 million barrels of oil per day. OPEC also announced about establishment of a “monitoring committee” that would presumably police member countries’ adherence to their respective production quotas.

Whether the deal is sustained will depend on how strictly the Cartel and other major producers stick to the agreement, something they haven’t always done in the past.

The prices rise for the moment, but the traders expect another 9 days of speculation until the outcome of the December 9 meeting among OPEC and non-OPEC representatives takes place.