Crude surges as non-OPEC producers agree oil output cut

December 12, 2016

Crude oil prices surged a huge $3 dollars or 5% higher at the Asian open with Brent briefly trading north of $57 and WTI above $54 a barrel before pulling back slightly. Global stock index futures have correspondingly gapped higher with expectations that energy and other oil-related stocks will rise in tandem with crude prices when the exchanges open in Europe and Wall Street. It follows news from Saturday that several non-OPEC members, including Russia, Mexico, Oman and Azerbaijan agreed to trim their oil output by a total of 558,000 barrels a day in an effort to remove the excess surplus and shore up prices. The OPEC has already committed to reducing its oil supply by 1.2 million barrels a day, starting from January.

Make no mistake about it – this historic agreement is a game changer. Although the crude oil rally has already started at the end of last month when the OPEC first announced the deal, I think there is plenty of fuel left in this rally. Admittedly, after a big gap we may see a retracement of some sort in prices now but ultimately the fundamentals still point to higher levels going forward. The oil market will now be balanced earlier than would have been the case without a deal. It is very likely that US shale producers will take advantage of this opportunity to ramp up their crude output once again but this will be a worry for another day. On top of the now-favourable supply-side dynamics, the global economic recovery is continuing at a steady pace, especially in the US. So rising demand for oil from the US – and China – could be additional factors that could help fuel a much larger rally in oil prices than many had envisaged a few months ago.

The oil-positive fundamental news combined with the bullish breakout above the recent ranges means momentum-based technical buying could help to accelerate the rally in the short-term. If the breakout is sustained, the next objective price move for Brent is at $60, a psychologically-important level, followed by $63, the last support level prior to the down move in the summer of 2015. For WTI, the last support prior to its breakdown was at $56.60 with the 2015 high coming in around $62.55. Those are among the bullish objectives that I am expecting oil prices to rally towards as we approach year-end. This bullish view would technically become void should oil prices move back and hold below the point of origin of their breakout levels at $50.80/51.60 area for WTI and around $54 for Brent. Even so, it is very unlikely in my view that we will move towards $30s any time soon.

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