The OPEC Production Cut Saga Continues

Just a week after the 14-nation OPEC leaders struck a surprise deal to limit production in a bid to stabilize oil prices, the initial euphoria is starting to fade. OPEC leaders face the next hurdle as negotiations begin with its non-OPEC counterparts. Ex-OPECs Secretary General, Abdalla Salem El-Badri said on Thursday last week that the non-OPEC commitment to cut oil production by 600,000 barrels per day is a “must,” underlining that the deal is still on shaky grounds.

Russia is expected to bear the major part of the non-OPEC production cuts, committed to lower production by 300,000 barrels, half of the non-OPEC production cuts.

NYMEX Crude oil futures for January 2017 contract month pulled back from its 52-week highs of $52.39 on December 5 after the strong gains in the run up to the November 30 OPEC meeting was showing signs of consolidation. Latest data showed that OPEC’s oil output rose to 34.19 million barrels per day in November, rising from October’s levels of 33.82 million bpd. Russia reported 11.21 million bpd in November, the highest in over 30-years.

On Tuesday, December 6, the American Petroleum Institute showed that U.S. crude oil stockpiles dropped more than expected despite a strong build of over 4 million barrels in Cushing, Oklahoma. Later in the week, the U.S. Energy information administration (EIA) released its weekly inventory report for the week ending December 2, 2016. Data showed that the commercial crude oil inventories decreased by 2.4 million barrels from the previous week, at 485.8 million bpd.

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EIA Crude Oil Inventories for week ending 02/12/16: -2.4 million bpd

Oil prices came under pressure this week after it emerged that the Saudi’s backed out of a meeting with Russia as part of its efforts to get non-OPEC members on board with its production cuts. OPEC leaders have now set the date for Saturday, December 10th as the next date for meeting with Russia.

 

Some experts believe that given the rally in oil prices to $50 a barrel, non-OPEC members may not be persuaded to cut production. Tim Evans, an energy futures specialist at Citigroup said that “further effective cooperation between oil producers seems unlikely in our view, as OPEC and Russia have already agreed on policy, reducing the leverage they have with other countries in our view.”

While Russia has so far maintained that it will cut production by 300,000 barrels per day Azerbaijan, another key non-OPEC player has signaled willingness to come to Vienna on Saturday with its own proposals for production cuts.

Analysts now think that the rally in oil prices is a bit “over done,” as SEB Bank’s chief commodities analyst, Bjarne Schieldrop says “Optimism over the OPEC cut decision has eroded a bit, the devil will be in the details.”

WTI Crude Oil, looking weaker near the highs

The WTI crude oil chart shows prices losing the momentum near the current highs of above the $51.60 handle. Although at the time of writing, oil prices are attempting to push higher, the technical outlook remains that of a near term correction in prices. Support is seen at $49.17 through $48.36, which prices could test in the near term, especially on a failure to break out above the resistance at $51.60.

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WTI Crude Oil Daily Chart: Resistance at $51.64

This weekend’s OPEC and non-OPEC meeting is quite unlikely to produce much of a “bang” for the oil markets, but any negative rumors could definitely hurt the sentiment. Oil prices are quite likely to remain supported above the $45 handle heading into the end of the year, but signs of a topping pattern are evident with the $51.64 resistance proving to be too hard to break and holding up on three tests to this level so far.