Oil prices rise sharply as OPEC reaches agreement

Oil prices rise sharply as OPEC reaches agreement

World oil prices have risen sharply after the OPEC decision to limit the level of oil production by 1.2 million barrels per day to 32.5 million.  The Agreement will be effective from January 1, 2017.

As of 08.51 am (MSK), the cost of the February futures of Brent crude oil on London's ICE trading have risen by 1.31% to $ 52.52 per barrel, while the January futures of WTI increased by 1.33% to $ 50.08 per barrel, breaking the psychological mark of $50 per barrel, RIA Novosti reports.

The OPEC agreement implies the participation of the countries outside the cartel. Their production will be reduced by a total of 600 thousand barrels per day, Russia will cut by as much as 300 thousand barrels per day. The agreement would start in January for a period for six months, with an option to roll it over for another six months.

Sberbank CIB analyst Valery Nesterov, speaking to Vestnik Kavkaza, said that the OPEC decision to cut oil production quotas was mandatory for the cartel, "otherwise, it could lose its reputation". "As a result, yesterday OPEC was able to confirm the fact that as an organization it is still working, and it is an important factor in the stabilization of the temporary situation in the oil market," he said.
At the same time, the expert stressed that "the oil price has a kind of its own logic of development, a lot here depends on financial institutions and speculators," Valery Nesterov drew attention.

Because of this, OPEC's decision is, in fact, short-term. "There will be many questions, in the first place, whether the OPEC countries could maintain discipline and stick to their new quotas," Sberbank CIB analyst expects.

In recent years, there is a new regulator of oil prices -  the US shale industry. "Therefore, probably, shale producers will be able to fill OPEC's niche. In general, now it is the decision of the cartel, which can stabilize the oil market a little. The volatility in oil prices is likely to continue," Valery Nesterov concluded.

The deputy director of energy policy of the Institute of Energy and Finances, Alexey Belogoriev, in turn, noted that OPEC's decision still came as a surprise due to exiting contradictions between Riyadh and Tehran. "The position of Saudi Arabia in this decision was the key one, while Iran was able to achieve maximum comfort, providing a small increase in its production," the expert said.

Belogoryev noticed that the reduced quota will operate only six months. "It's likely that in June 2017 the quota will be reviewed, because if they manage to achieve production of 32.5 million barrels per day in OPEC and its cut by 600 thousand barrels per day outside of OPEC, it would lead to a shortage of oil in the next spring," he pointed to the same factor as Valery Nesterov.

"In this regard, OPEC will try to keep oil prices in the corridor from $50 to $60 per barrel," the deputy director of energy policy of the Institute of Energy and Finances concluded.


Vestnik Kavkaza

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