On Nov 30th, during OPEC’s 171st meeting in Vienna, an agreement was reached to reduce output by 1.20 Mb/D to a ceiling of 32.5, for monthly oil production out of the cartel. Later, at a joint Non-OPEC meeting, Russia has pledged to cut supply by 0.56 Mb/D, in-line with the OPEC’s requirements for coordinated efforts globally to reduce a global supply glut, bringing the total cut, effective Jan 1st to the end of the first 6 month “Algiers Accord” period, to 1.76 Mb/D.

In this unprecedented and unexpected move that shocked markets and has driven crude prices higher, Saudi Arabia has taken on the bulk of cut with a mandate for immediate implementation. Good faith was shown, by the most dominant OPEC nation, to follow through on the agreement and other OPEC and Non-OPEC nations are expected to adjust their output by the 6 month renewal date for the agreement.

Saudi Arabia has yielded to Iran to help push the agreement forward; with the agreement allowing for a 90 Kb/D increase in production for IRAN, and prorated cuts across-the-board for the remaining OPEC nations.

Crude markets jittered ahead of the meeting as an apparent stalemate between Russia and Saudi Arabia took place and the rumor mill was full throttle with regard to Russia’s presence/involvement at the meeting. The markets doubted that an agreement would be struck as a lack of coordination from Russia, Iran unwillingness to cut in line with Saudi Arabia in a post sanction era, and Iraq’s call for much needed oil revenues to facilitate ISIS fight.

In the wake of the OPEC agreement, recent Commitment of Traders reports signal a rapid reversal in Oil shorts. The barrel is trading firmly in positive territory recently, on a 50-handle, $53.99 last, and put in a high of $55.44 on news of cooperation from Russia.

Though market participants continue to proceed cautiously as the agreement is fulfilled its 6 month term. The last couple of unexpected inventory builds have put a damper on markets, keeping prices constrained over the holiday trade, though a recent larger than expected draw -7.10M vs -2.15M (Exp) is precisely what traders will be looking for confirmation as production quotas are implemented and feedback into US storage.

Contango has come off the back end substantially, with the market backwardating in the second half of 2017, on the back expectations for a draw in inventories by then. Spreaders brought the curve in, from Q2 onwards, between $0.50 and $2.00 in the most actively traded time spreads.

Market participants will be looking for continued support of the agreement between OPEC and Non-OPEC oil producers. Historically, OPEC, has demonstrated a shaky track record for sticking to production agreements and with so many “moving parts” involved, this time around in the current deal, traders will be carefully evaluating commitment and follow through. OPEC General Secretary Barkindo is to hold an informal meeting, on Jan 12-13th, with Saudi Arabia, Kuwait, Algeria, UAE, Qatar and Iraq oil ministers; commentary will be closely scrutinized as markets look for transparency with regard to progress towards production cuts.

-David Felkai Uptick GMA.

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