By Sarah McFarlane and Alison Sider
Oil futures began the year with a jump Tuesday, with U.S. crude prices hitting an 18-month high, boosted by optimism that the crude-production cuts agreed to late last year will help to drain global stockpiles.
The Organization of the Petroleum Exporting Countries, along with other oil producing countries including Russia, agreed to cut output by 1.8 million barrels a day or around 2% of global production starting this month. Oil prices have gained around 25% since the Nov. 30 OPEC agreement.
Whether oil producers stand by their agreement and cut, and how U.S. drillers respond to continued price rises, will help setdirection for the oil market into the new year. Many analysts are skeptical that producers will stick to their agreements, but on Tuesday market participants were betting that they will.
U.S. crude futures were recently up $1.12, or 2.08%, at $54.84 a barrel on the New York Mercantile Exchange, after climbing as high as $55.24 in earlier trading. Brent crude, the global oil benchmark, rose $1.15, or 2.02%, to $57.97 a barrel on London's ICE Futures exchange.
"It may be moving in anticipation that evidence will emerge that stocks are coming off," said Gareth Lewis-Davies, senior commodity strategist at BNP Paribas.
Oil prices last year posted their biggest gains since the financial-crisis-era rebound in 2009, a recovery fueled by the apparent willingness of OPEC to cut supply again. Stocks remain at high levels, however, with global inventory estimated at around 3 billion barrels.
"As long as this strong belief keeps holding, prices will remain supported and could rise further, which is no longer justified fundamentally," said Carsten Fritsch, analyst at Commerzbank AG.
Confidence in the production agreement was bolstered after officials in Oman and Kuwait indicated that they are in the process of enacting the agreed-upon cuts, analysts said.
Traders and analysts expect evidence of the cuts to have materialized by late January but are cautious due to OPEC members' checkered history when it comes to adhering to quotas.
"It's going to be a year in which price action is driven by OPEC and these cuts," said Virendra Chauhan, oil analyst at Energy Aspects in Singapore. "It's going to be very much a case of the extent that these guys are complying with the production cuts set at the end of November."
A risk to the sustained recovery of the oil market will be how U.S. oil producers respond to the higher oil prices, after the production-cut dealsent prices back above $50 a barrel. Already, U.S. shale producers have responded to last year's price rebound by adding rigs, and any steep increase in prices is likely to spur more drilling.
U.S. oil rig numbers have been steadily rising since last summer, but due to the time lag between drilling activity and production, the additional production is yet to come on stream.
Positive manufacturing data also bolstered prices, said John Kilduff, founding partner of Again Capital.
"Beyond the production deal, there's a lot of good news in the manufacturing sector which is energy intensive," Mr. Kilduff said.
Gasoline futures rose 1.94 cents, or 1.16%, to $1.6903 a gallon. Diesel futures rose $1.51 cents, or 0.87%, to $1.7433 a gallon.
--Dan Strumpf contributed to this article.
Write to Sarah McFarlane at email@example.com and Alison Sider at firstname.lastname@example.org
(END) Dow Jones Newswires
January 03, 2017 11:09 ET (16:09 GMT)
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