Crude oil faces slippery road to sustained recovery

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Crude oil faces slippery road to sustained recovery
A worker checks the valve of an oil pipe at a Lukoil-owned oil field outside the Siberian city of Kogalym, Russia.

dubai - Prices will hinge on whether Opec sticks to its output cut pledge and action by US producers

By Dharmesh Bhatia

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Published: Sat 14 Jan 2017, 6:56 PM

Last updated: Sat 14 Jan 2017, 8:58 PM

Crude oil recorded lucrative gains in 2016 as prices rebounded from decade-low levels of $26 per barrel in February of last year. Soaring over 50 per cent, this marked the first annual gain for Brent crude oil in four years.

The over 45 per cent rally in WTI crude oil also marked the first yearly increase, following the sell-off, totalling -76 per cent, over the previous two years (crude oil peak prices were in 2014 - $107; 2015 - $62 and 2016 - $54).

Apart from the low base, the rally was driven by ongoing speculations that Opec and non-Opec producers would freeze or cut output. Such hopes culminated in the deal, announced in December 2016, that Opec decided to cut its crude production by 1.2 million barrels, effective January 1, 2017, while non-Opec producers, including Russia but not the US, would reduce output by around 0.6 million barrels per day (bpd).

Opec members stood united in what was described as the most important meeting in recent history and gave crude oil a fresh life after the organisation, along with Russia, cut a deal to reduce output and drain a global supply glut.

Oil shot up over 10 per cent and Nymex crude surged to as high as $49.87 per barrel after output cut. It was Opec's first oil output reduction since 2008 after the leader Saudi Arabia accepted "a big hit" and dropped the demand that arch rival Iran also slash output. The deal also included the group's first coordinated action in 15 years with non-Opec member Russia.

Opec produces a third of global oil, or around 33.6 million bpd, and under the new deal has said it would reduce output by around 1.2 million bpd from January 2017. That would take its output to January 2016 levels, when prices fell to over 10-year lows amid ballooning supply.

This historic occasion, marked as the 'Algiers Accord,' saw Opec member countries unified in approving a new production target range. The focus was on accelerating the drawdown of the stock overhang and bringing the market rebalancing forward.

The agreement was reached despite huge political hurdles. Iran and Russia are effectively fighting two proxy wars against Saudi Arabia, Yemen and Syria, and many sceptics had said the countries would struggle to find a compromise. There was rumour mongering, conflicting statements and a lot of volatility as Iran, Iraq, Libya and Nigeria were opposing the deal and seeking exemption from production freeze under special conditions. Russia had previously resisted participating and instead pushed production to new records in recent months.

Elsewhere, US investors speculated that the oil production slowdown overseas could be good for business in the US. Under incoming President Donald Trump, oil exploration is expected to be allowed off the coast of Virginia and off the coast of Florida. Arctic and Antarctic exploration, banned by current President Barack Obama, could also be allowed by the Trump administration.

The path ahead for the oil market, however, is expected to be volatile, as those who positioned for a rally unwind their trades to book profits. The possibility that Opec will be unable to meet its commitment to cut production could also undermine prices. That makes the long-term path for oil more uncertain, but few expect the commodity to reach $60 a barrel soon.

The writer is manager - commodities market at Emirates NBD Securities. Views expressed are his own and do not reflect the newspaper's policy.


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