Oil prices hit 18-month highs on the first full trading day of 2017, following reports by Al-Ansa newspaper that OPEC member Kuwait has cut output by 130,000 barrels a day to about 2.75 million a day, according to Kuwait Oil Co. Chief Executive Officer Jamal Jaafer. Meanwhile, Oman was sait to cut 45,000 barrels a day from 1.01 million, the Oil Ministry’s Director of Marketing Ali Al-Riyami said on Oman TV.
And so, the surge which made oil the best performing asset class of 2016, driven by expectations of an OPEC production cut, continued following reports that this production cut was being implemented, if only for the time being by nations close to Saudi Arabia, and this unlikely to challenge the Vienna deal: the real question is whether the more "rogue" OPEC members will comply with their part of the bargain and certainly how the non-OPEC members will react.
“The new year sees the start of the output cuts that were agreed between OPEC and some non-OPEC producers,” Hamza Khan, head of commodities strategy at ING Bank NV in Amsterdam, told Bloomberg.
As a result of the favorable production cut news, West Texas Intermediate gained as much as $1.52 to $55.24 a barrel on the New York Mercantile Exchange and was at $55.05 as of 9:37 a.m. London time. Total volume traded Tuesday was 7% above the 100-day average.
Brent for March settlement climbed $1.33 to $58.15 on the London-based ICE Futures Europe exchange, trading at a $2.22 premium to WTI for the same month. The global benchmark contract rose 52 percent last year, the most since 2009.
"First signals suggest the OPEC and non-OPEC production cuts are raising hopes that the global oil oversupply will diminish," said Hans van Cleef, senior energy economist at ABN AMRO Bank N.V. in Amsterdam. Ric Spooner, chief market analyst at CMC Markets, agreed: "Markets will be looking for anecdotal evidence for production cuts," he said. "The most likely scenario is OPEC and non-OPEC member countries will be committed to the deal, especially in early stages."
On the other hand, should oil prices continue to rise much higher, it will likely mean even greater shale production: last Friday, Baker Hughest announced that drillers in the U.S. increased the rig count by two to 525 last week, the highest level in one year, while in December Russia pumped 11.2 million barrels a day just shy of the post-Soviet record and near a 30 year high. Russia has agreed to cut output by 300,000 in 2017. It remains to be seen if it will comply.
OPEC output in December was largely unchanged from November, and also remains near record high levels.
Meanwhile, assuming the Kuwait and Oman news are accurate, production among other OPEC members continued to rise, and Libya, one of two OPEC countries exempt from the output cuts, has increased its production to 685,000 bpd, from around 600,000 bpd in December, an official at the National Oil Corporation said on Sunday.