Crude oil edged higher Friday as optimism about a tentative agreement to cut production among members of the Organization of the Petroleum Exporting Countries outweighed doubts about the deal.
West Texas Intermediate crude for November delivery rose 41 cents, or 0.86%, to $48.24 a barrel on the New York Mercantile Exchange. Brent, the international benchmark, rose 25 cents, or 0.5%, to $50.06.
Crude futures rose 7.92% in September—their largest monthly gain since April. Prices surged this week after OPEC members caught the market off-guard by reaching a preliminary agreement to slash the group’s output to between 32.5 million and 33 million barrels a day, from 33.2 million barrels a day in August. A more definitive policy, including production caps for individual members, will be discussed and possibly ratified at OPEC’s next meeting on Nov. 30 in Vienna.
Divisions are emerging between market participants who believe the deal represents a fundamental pivot by major producers that will help bring supply in line with demand more rapidly, and those who remain deeply skeptical that the group can pull it off.
“You have to keep in mind that this is a sign that the Saudi Arabians in particular seem willing to alter the stance they adopted at the 2014 meeting where maintaining market share was their policy,” said Gene McGillian, research manager for Tradition Energy. “The market is going to show a positive response to their initiative.”
While the fact that OPEC was able to reach consensus on a production cut was seen as bullish, other analysts said it likely wouldn’t be enough to push U.S. crude prices much higher. Many have doubts about whether the deal between members that have often been at odds in recent years will hold. Iraq has already said that it doesn’t trust the production numbers OPEC typically relies on.
“I think it’s going to go right back down because I think this OPEC thing is flimsy as hell,” said Mark Waggoner, president of Excel Futures.
Analysts also expressed concern that cartel members haven’t always been forthcoming about their production levels and haven’t abided by quotas in the past.
“OPEC has no way of enforcing the quotas,” said Jonathan Chan, an energy analyst at Phillip Futures.
Russia’s willingness to go along with the deal is a wild card. And U.S. shale producers, whose technology enables them to increase oil production quickly, may also swoop in and widen their spigots to capture the higher margins, analysts said.
Production by Saudi Arabia is also edging lower as the kingdom usually curbs its output in the winter months given lesser domestic demand for power generation. BMI Research expects a daily decline of 360,000 barrels in output between August and November this year.
The Wall Street Journal: September 30, 2016