OPEC Deal Lifts Oil Futures

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled higher Wednesday afternoon following a precipitous rally after the Organization of the Petroleum Exporting Countries reached a crucial agreement to reduce production effective January and the U.S. Energy Information Administration reported a crude stock draw for the week-ended Nov. 25.

Following months of failed attempts to reach a deal and after tough negotiations OPEC said its 14 members today signed off on a pact that would limit total output to 32.5 million barrels per day (bpd), guaranteeing a reduction of 1.2 million bpd starting Jan. 1, 2017, with the agreement better than what most analysts thought would occur. The output rate is at the lower end of OPEC's Algiers accord signed on Sept. 28 that proposed an output cap of 32.5 million to 33.0 million bpd. The group produced 33.64 million bpd in October.

OPEC hopes today's decision will accelerate an ongoing drawdown of the stock overhang and bring a rebalancing of the oil market forward. OPEC also anticipates non-OPEC producers would support the effort by cutting 600,000 bpd of their own output, with Russia expected to reduce output by 300,000 bpd. Russia, the world's largest oil producer with output in October at 11.32 million bpd, initially indicated it would only freeze output or cut supply if OPEC acted first with a reduction.

With the deal now signed and sealed, attention turns to delivery. Analysts said they want to see if OPEC will institute mechanisms to ensure strict compliance with the terms of the agreement, or if the pact would have a meaningful impact in drawing down supply.

"OPEC has agreed to cut production equates to a 4.5% to 4.6% cut per member country," said Barclays Capital in a report. "We believe the outcome is consistent with our view of what OPEC production levels were expected to be in 2017 irrespective of the deal reached today. In other words, the meeting is highly unlikely to substantially affect the oil market balance."

At settlement, NYMEX January West Texas Intermediate crude oil futures rallied $4.21 or 9.3% to $49.44 per barrel (bbl), ending near a one-month high of $49.90. The January Brent crude oil futures contract on the ICE complex soared $4.09 or 8.8% to $50.47 bbl where it expired, near a one-month high of $50.49 with the February contract up $4.52 to $51.84 bbl.

The NYMEX December ULSD futures contract skyrocketed 10.82 cents or 7.4% to $1.5709 gallon, off a one-month high of $1.5809 and January futures were up 9.85 cents at $1.5763 gallon. December RBOB futures spiked 11.37 cents or 8.3% to expire at $1.4908 gallon, near a one-month high of $1.50, with the January contract up 10.53 cents to 1.4825 gallon.

The EIA's report for the week-ended Nov. 25 showed U.S. crude stocks fell by 884,000 bbl last week instead of an expected build of 1.2 million bbl. Distillate supplies jumped by a more-than-expected 5.0 million bbl and gasoline stocks increased 2.1 million bbl.

With the market fixated today's OPEC meeting, there was little reaction to the EIA report that was bearish for oil products.

George Orwel can be reached at george.orwel@dtn.com