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Are we on for $60 oil?
By Harriet Mann | Mon, 12th December 2016 - 13:18
After OPEC's deal to reduce production by 1.2 million barrels of oil per day (bopd) in the New Year, a non-OPEC roundtable has agreed to cut its oil output by 558,000 bopd - just shy of its 600,000 barrel target. Joined by ten other non-OPEC countries including Mexico, Bahrain, Azerbaijan and Kazakhstan, Russia doesn't seem too bothered that it's accounting for over half the cut.
And Saudi Arabia may be prepared to go further, too. In the aftermath of Sunday's meeting, oil minister Khalid al-Falih said: "I can tell you with absolute certainty that, effective 1 January, we're going to cut and cut substantially to be below the level that we have committed to on November 30."
Oil prices have since shot to levels not seen since the summer of 2015, and oil equities have piggy-backed on the momentum. It's a shame, however, that many believe this will only scratch the surface.
Brent crude jumped to over $57 a barrel before easing back to $56.50 Monday, although that's still up 4%. Oil dominated the stockmarket risers: Royal Dutch Shell (RDSB) is leading London's blue-chip index, up 4% to 2,264p, and BP (BP.) is up 2% at 486p.
This wasn't enough to drive the FTSE 100 (UKX) higher, however, as investors banked recent gains. But with the first US rate rise of the year expected this week, further momentum on the US markets could help drive London's premier index close to record highs.
On the broader FTSE All-Share, development and production company EnQuest (ENQ) rocketed as much as 10% to 44p and Premier Oil (PMO) also enjoyed double-digit growth to 75p. Tullow Oil (TLW) jumped 8% to 339p. AIM tiddler Global Petroleum (GBP) was the clear winner on the junior market, with its market value surging by over a quarter to £4.1 million.
Is it enough?
Russian supply broke a post-Soviet record as daily production averaged over 11 million of barrels in September, according to Bloomberg data. Include output from Saudi Arabia, and the pair account for more than a fifth of global oil supplies.
But even with its new-found friends, there is still a lot of extra global production sloshing around, and some may try and take advantage of a new gap in the market.
"It is very likely that US shale producers will take advantage of this opportunity to ramp up their crude output once again, but this will be a worry for another day," says Fawad Razaqzada, market analyst at Forex.com.
We may see a retracement now but the fundamentals point to higher prices going forwardUsually a swing producer - altering its oil production to support the market - Saudi Arabia decided to prioritise market share over the short-term pain of lower oil prices when the market tanked in 2014.
But this had all changed by September this year, when the oil cartel initially decided to make the cut. The lack of specifics made the market dubious, but last month's conference in Vienna changed all that.
Saudi initially agreed to cut production by 486,000 bopd in a bid to bring OPEC output down to 32.5 million bopd, but signalled over the weekend that it's willing to go even further.
"Make no mistake about it - this historic agreement is a game-changer. Although the crude oil rally had already started at the end of last month when the OPEC first announced the deal, I think there is plenty of fuel left in this rally," added Razaqzada.
"Admittedly, after a big gap we may see a retracement of some sort in prices now but ultimately the fundamentals still point to higher levels going forward.
"If the breakout is sustained, the next objective price move for Brent is at $60, a psychologically-important level, followed by $63, the last support level prior to the down move in the summer of 2015."
An Aramco IPO now would go a long way towards balancing Saudi's booksHowever, many argue that with global oil production at around 96.1 million bopd (according to data from the IEA), a 1.76 milion bopd cut for six months isn't going to be enough to drain the supply glut that caused oil priced to crash from over $100 a barrel two years ago.
The oil price spike should also bring Saudi Arabia a step closer to its planned IPO of state-owned oil business Aramco. With a severe budget deficit, the sale would go a long way to shore up its balance sheet and shouldn't be underestimated, our head of investment Rebecca O'Keeffe said earlier today.
"An IPO now would go a long way towards balancing the books and avoid Saudi Arabia being a forced seller of equities (and other assets) in 2017."
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.