SINGAPORE - An agreement between oil producer club OPEC and Russia to produce less to drain a global glut sent prices soaring in record trading volumes on Thursday, even as analysts warned other producers will likely top up supply.
The Organisation of the Petroleum Exporting Countries (OPEC)agreed on Wednesday its first oil output reduction since 2008 after de-facto leader Saudi Arabia accepted "a big hit" and dropped a demand that arch-rival Iran also slash output.
The deal also included the group's first coordinated action with non-OPEC member Russia in 15 years. On Thursday Azerbaijan said it was also willing to engage in talks on cuts. "OPEC has agreed to an historic production cut," analysts at AB Bernstein said. "The cut of 1.2 million barrels per day (bpd) was at the upper end of expectations (0.7-1.2 million bpd). An additional cut of 0.6 million bpd from non-OPEC countries could significantly add to what has been announced by OPEC."
The price for Brent crude futures, the international benchmark for oil prices, jumped as much as 13 per cent from below US$50 (S$71.50) on Wednesday and was at US$52.10 per barrel at 0806 GMT, although traders pointed out that part of the jump was down to contract roll-over from January to February for Brent's front-month futures.
US West Texas Intermediate (WTI) crude futures rose back above US$50 briefly before easing to US$49.63 a barrel at 0806 GMT, though still up 20 cents from its last settlement. "OPEC has delivered an agreement," said Jason Gammel of US investment bank Jefferies. "Bulls got as much as could be hoped for...For the time being, oil prices have received a huge support."
The development also triggered frenzied trading, with Brent futures trading volumes for February and March, when the supply cut will start to be visible in the market, hitting record volumes.
The second front-month Brent crude futures contract, currently March 2017, traded a record 783,000 lots of 1,000 barrels each on Wednesday, worth around US$39 billion and easily beating a previous record of just over 600,000 reached in September. That's more than eight times actual daily global crude oil consumption.
April Brent traded 288,000 lots of 1,000 barrels each, compared with a previous record of 228,7000 lots done in July 2014.
The records also meant that Brent volumes far exceeded trades in US West Texas Intermediate (WTI) crude futures, which tend to be higher than those for Brent, but which registered only 368,000 and 214,800 lots for March and April, respectively.
Despite the agreed deal, some doubts over the cut remained."This is an agreement to cap production levels, not export levels," British bank Barclays said.
"The outcome is consistent with... what OPEC production levels were expected to be in 2017 irrespective of the deal reached." Meanwhile US bank Morgan Stanley said that "skepticism remains on individual countries' follow-through (on the cut), which is keeping prices below year-to-date highs (of $53.73 per barrel in October) for now."
Despite the jump in prices, they are still only at September-October levels - when plans for a cut were first announced - and prices are at less than half their mid-2014 levels, when the global glut started.
Goldman Sachs said in a note following the agreement that it expected oil prices to average just US$55 per barrel in the first half of next year.
OPEC produces a third of global oil, or around 33.6 million bpd, and the deal aims to reduce output by 1.2 million bpd from January 2017, similar to January 2016 levels, when prices fell to over 10-year lows amid ballooning oversupply.
Analysts said that the cuts would leave the field open for other producers, especially US shale drillers. "We do not believe that oil prices can sustainably remain above $55 per barrel, with global production responding first and foremost in the US," Goldman Sachs said.
US crude production has risen by over 3 per cent this year to 8.7 million bpd, as its drillers have aggressively slashed costs.