Thursday, September 29, 2016

Oil Prices Flat After OPEC Output Cut Agreement As Caution Already Mounting

By Huileng Tan
CNBC
September 29, 2016

Oil prices were flat in Asian trade after a surprise OPEC deal to limit output, as skepticism mounted over how the oil cartel would enforce the cut.

At an informal meeting at Algiers, the 14-member OPEC agreed to cut production for the first time since 2008, proposing new production levels at 32.5 million to 33 million barrels a day, a 700,000 drop on August production levels at 33.24 million barrels a day. More details are expected to be hammered out at the group's next policy meeting on November 30.

Once OPEC hits its target, the group will seek support from non-member oil producers to further ease the global supply glut, Reuters reported.

Oil prices settled up nearly 6 percent on Wednesday in the U.S. after news of the deal, then continued to rise early in Asian trade before those gains pared. Benchmark U.S. West Texas Intermediate were traded around $47.10 a barrel and European Brent crude moved around $48.60 a barrel around 11am HK/SIN time.

The rise tapered off as the market became increasingly cautious over the details of the agreement and how it would be enforced, particularly since the OPEC members have a history of not adhering to production quotas.

"The Saudis will probably do their part but there will be a lot of temptation on the part of the other OPEC members to boost their production despite the agreement, which was what we saw happen frequently during the 1980s when OPEC used to limit their production. It was mainly Saudi Arabia that was cutting its production; the other members weren't really following through with their end of the deal," CME Group's economist Erick Norland told CNBC's "The Rundown" on Thursday.

Wells Fargo Funds chief portfolio strategist Brian Jacobsen added, "It's is an organization in name only. These are political entities. They are motivated by more political factors here."

That the OPEC decided unexpectedly to cut output also pointed to larger macroeconomic issues and a supply-demand mismatch that would continue to weigh on the market, one expert said.

"A cut in production may be welcome for traders, but for investors it's yet another signpost that the massive stimulus efforts we have seen around the globe have yet to bear fruit in terms of delivering moderately faster growth," Adviser Investments CIO Jim Lovell told CNBC.

While global demand growth has been soft, energy supply has kept growing, CME's Norland said, meaning U.S. weekly crude oil inventory was now up about 10 percent on-year and 41 percent higher than two years ago.

Despite the caution on the nature of the OPEC deal, oil prices will get some support from the latest maneuver, pros said.

"These collusive agreements rarely amount to much over the long-term but in the near term here, I think we do have oil moving back into a more sustainable region," said Wells Fargo's Jacobsen.

Oil prices would likely stay in the $43-$53 a barrel range over the next year, but will increasingly move from the lower to mid and upper-end of the range, he added.


Article Link To CNBC: