MARKET WATCH: Oil prices continue to rise as optimism builds for OPEC deal

Confidence expressed by the oil ministers of Iraq and Iran on the likelihood of a deal to limit oil production among members of the Organization of Petroleum Exporting Countries resulted in big crude oil-price gains on the New York and London markets on Nov. 21 (OGJ Online, Nov. 21, 2016).

Delegates from OPEC have been convening this week to discuss their concerns ahead of the formal meeting Nov. 30 in Vienna. While representatives of member countries such as Iraq, Iran, and Nigeria, as well as outsider Russia, have each made positive comments about a possible outcome next week, individual targets for members—a key sticking point—is yet to be settled.

OPEC hopes to limit production at 32.5-33 million b/d. The organization in October produced a record 33.64 million b/d as Nigeria, Libya, and Iraq all reported increases (OGJ Online, Nov. 11, 2016).

“For our part, we continue to see clues in OPEC export data supporting the likelihood of a cut,” analysts at Cowen & Co. said in a research update. “OPEC exports reached multiyear highs in October but the destination regions that saw the most growth—Africa, India, [European Union]—appear fragile or in need of inventory restock, while core importers in Asia and the US have pulled back.”

They noted that the supply-demand balance for first-half 2017 is more oversupplied than that of a year earlier at current OPEC output, “with demand forecasts decelerating and non-OPEC production, specifically in the US, bottoming out.

“Meanwhile, several OPEC countries, including UAE, Iran, and Nigeria, continue to seek operating and financial partners for longer-term production targets, and higher oil prices are necessary to attract bids,” the analysts said. “With Russia appearing willing to at least participate in a freeze, there are significantly more factors supporting an OPEC cut than working against it, particularly if Saudi Arabia takes leadership on lower output targets.”

Ole Hansen, head of commodity strategy at Saxo Bank, observes that OPEC has “undoubtedly become the biggest driver of oil volatility and once again the market is taking the promise of a production cut at face value.”

He noted that “increased supply from Libya, Nigeria, Iran, and even the North Sea has seen the Atlantic Basin become oversupplied,” but an output deal “is likely to speed up the rebalancing process.”

Assuming OPEC agrees to cut production by at least 800,000 b/d, Hansen believes Brent could “once again challenge the ceiling” of about $54/bbl.” However, he said, “The initial move would be driven by short-covering, and once that is done, the market may pause and retrace in the realization that OPEC’s ability to comply with its own production targets have been very poor in recent years.”

Energy prices

The December crude oil contract on the New York Mercantile Exchange increased $1.80 on Nov. 21 to close at $47.49/bbl. The January contract rose $1.88 to $48.24/bbl.

The natural gas contract for December climbed 10.7¢ to $2.95/MMbtu. On the spot market, the Henry Hub gas price was $2.80/MMbtu, rising 22¢.

Heating oil for December gained 6.68¢ to a rounded $1.52/gal. The price for reformulated gasoline stock for oxygenate blending for December rose 5.74¢ to a rounded $1.40/gal.

The Brent crude contract for January on London’s ICE increased $2.04 to $48.90/bbl. The February contract gained $2 to $49.97/bbl. The December gas oil contract jumped $23 to $477/tonne.

The average price for OPEC’s basket of benchmark crudes on Nov. 21 was $44.34/bbl, rising $2.01.

Contact Matt Zborowski at matthewz@ogjonline.com.

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