NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled sharply higher again Thursday afternoon amid a follow-through rally spurred by Wednesday's agreement by leading producers to cut production starting in the New Year, with a downward move by the dollar also boosting the oil complex.
An agreement by the Organization of the Petroleum Exporting Countries would reduce the group's total production by 1.2 million bpd, to 32.5 million bpd, effective Jan. 1.
Non-OPEC producers are expected to trim their own supply by 600,000 bpd, with Russia agreeing to cut 300,000 bpd from its production. Azerbaijan and Mexico are reportedly expected to chip in with partial shut-ins of their output.
"The market is starting to realize this cut is for real, and if they go ahead and cut in January, the prices will go much higher," said analyst Phil Flynn at Price Futures in Chicago. "Those who were in denial are coming around and they better believe it. Demand is there ... Chinese manufacturing data came out today at a two-year high."
Other analysts agreed with Flynn, with a surge in open interest in the oil futures complex following the deal offering evidence. Trade volume for WTI futures on Wednesday of 2,530,530 contracts blew past the previous record high of 1,861,909 contracts set Nov. 9, the CME Group reports.
WTI and Brent crude futures trading volumes for February and March are sharply higher, coinciding with the implementation of the OPEC cuts. "Volume records set on Wednesday also suggest a strong flow of futures and options trade as money managers and hedgers alike look to rebalance their portfolios," said analyst Tim Evans at Citi Futures. "Speculators and consumers are buying, while oil producers look to be hanging back, waiting for higher prices."
Another notable aspect of today's trade is an explosion of spread trading, with spot-month Brent crude trading at a premium to WTI crude at a more than $2.80 bbl 3 1/2-month high. The impact of the OPEC agreement on products was also explosive, with ULSD and RBOB futures gaining more than 12% over the past two sessions. OPEC hopes the output cuts will accelerate a drawdown of the crude supply overhang and rebalance the market over the next six months, with the group set to review the decision next May. They believe that rising demand from the United States will help in the market rebalancing.
In late trade, NYMEX January WTI crude futures settled $1.62 higher, at $51.06 bbl, off a better than six-week spot high of $51.80. The WTI contract broke above $50 bbl today for the first time in a month. February Brent crude oil futures on the ICE complex advanced $2.10 to a $53.94 bbl settlement, off a 16-month spot high of $54.53. WTI futures have rallied 13% in two days and the Brent contract 16%. NYMEX January ULSD futures rallied 7.16 cents, or about 4.6%, to $1.6479 per gallon, off a 15-month spot high of $1.6634. The January RBOB futures contract jumped 6.45 cents or about 4.5% to $1.5470 per gallon, off a four-week spot high of $1.5732.
On Friday, the market will consider employment data for November released by the Labor Department at 8:30 AM ET, and the U.S. rig count for this week from Baker Hughes, Inc. set for publication at 1:00 PM ET.
George Orwel can be reached at email@example.com
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