By Jenny W. Hsu
Crude futures moderated in early Asian trade on Friday, but market sentiment remains bullish on prices trending higher as major oil producers prepare to taper their production.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in January traded at $50.92 a barrel at 0307 GMT, down $0.14 in the Globex electronic session. February Brent crude on London's ICE Futures exchange fell $0.34 to $53.60 a barrel, but is up 11% this week so far, buoyed by the Organization of the Petroleum Exporting Countries' decision on Wednesday to pull back their output by 1.2 million barrels a day.
Oil prices jumped to a fresh year's high overnight on reports that leading non-OPEC producers, such as Russia and Oman, have also agreed to reduce their output.
The production cut pact is expected to take effect in January and participating oil nations will reassess in six months with an option to extend the accord for another six months.
If the deal is fully observed, it could shift the market into a deficit as early as the first half of next year. Brent prices could edge up to average between $55 and $60 a barrel in 2017, said Simon Flowers, chief analyst at consultancy Wood Mackenzie.
"However, this does depend on OPEC being very careful to meet the terms of the agreement," he cautioned.
Skepticism over members' compliance with production quotas isn't without ground as members have cheated their quotas in the past by underreporting or producing beyond their allotted limits.
Based on a Goldman Sach's forecast, compliance rate by members this time around is approximately 73% of the target, which would put OPEC's overall production at 33 million barrels a day.
JBC Energy expects compliance to be between 70% to 80% over the first quarter next year, but may tick lower when seasonal demand kicks in April. Crude demand in the Middle East, in particular Saudi Arabia, typically surges in the summer months to meet the increasing need for air conditioning.
But not everyone is impressed by the deal with some questioning the actual effectiveness of the pact.
"Cutting production when it is at an all-time high is not very helpful," said a Chinese oil trader based in Singapore. In October, OPEC production hit a record level at 33.64 million barrels a day. Russia's production also reached a post-Soviet high at 11.2 million barrels a day in the same month.
Moreover, OPEC's deal only cuts production but not exports. So, countries with high storage capacity and inventories such as Saudi Arabia will still be able to maintain their market share by drawingdown existing stockpiles, while for countries like Iraq with less than two weeks worth of oil stocks, a cut "may not be palatable", said BMI Research.
Nymex reformulated gasoline blendstock for January--the benchmark gasoline contract--fell 83 points to $1.5387 a gallon, while January diesel traded at $1.6427, 52 points lower.
ICE gasoil for December changed hands at $470.50 a metric ton, down $3.00 from Thursday's settlement.
Write to Jenny W. Hsu at firstname.lastname@example.org
(END) Dow Jones Newswires
December 01, 2016 22:55 ET (03:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.