Oil jumps most since June on Saudi-Russian Pact, trade war truce

Oil prices jumped by more than 5% on Monday after the US and China agreed to a 90-day truce in a trade dispute, and ahead of a meeting this week of the producer club Opec that is expected to cut supply.

US light crude oil rose $2.92 a barrel to a high of $53.85, up 5.7%, before easing to around $53.00 by 1240GMT. Brent crude rose 5.3% or $3.14 to a high of $62.60 and was last trading around $61.75.

Futures in New York advanced 4% Monday, bouncing back from the worst monthly loss in a decade. “From Argentina to Alberta, the oil market news is about supply curtailments,” said Norbert Rucker, head of commodity research at Swiss bank Julius Baer.

Crude prices plunged over the past two months on fears of a global oversupply. China and the US agreed during the G20 meeting in Argentina not to impose additional trade tariffs for at least 90 days while they hold talks to resolve existing disputes.

The US-China trade war has weighed heavily on global trade, sparking concerns of an economic slowdown. Crude oil has not been included in the list of products facing import tariffs, but traders said the positive sentiment of the truce was also driving crude markets.

For a time, oil pared gains on Monday after an OPEC advisory panel was said to make no recommendation for action and people familiar with negotiations said Russia and the Saudis still haven’t agreed on details of a cut.

Oil also received support from an announcement by the Canadian province of Alberta that it would force producers to cut output by 8.7%, or 325,000 barrels per day (bpd), to deal with a pipeline bottleneck that has led to crude building up in storage.

The Organization of the Petroleum Exporting Countries (Opec) meets on 6 December to decide output policy. “A brightening market mood will likely extend today’s price rally in the very near term.”

The group, along with non-Opec member Russia, is expected to announce cuts aimed at reining in a production surplus that has pulled down crude prices by around a third since October.

Over the weekend, U.S. President Donald Trump and his Chinese counterpart Xi Jinping called a pause in their trade dispute after a dinner at the G-20 event. The global benchmark crude was at an US$8.59 premium to WTI for the same month.

“Markets are expecting to see a substantial production cut after Russian President Vladimir Putin said his country’s cooperation on oil supplies with Saudi Arabia would continue,” said Hussein Sayed, chief market strategist at brokerage FXTM.

Within Opec, Qatar said on Monday it would leave the producer club in January. Qatar’s oil production is only around 600,000 bpd, but it is the world’s biggest exporter of liquefied natural gas (LNG).

Outside Opec, Russian oil output stood at 11.37 million bpd in November, down from a post-Soviet record of 11.41 million bpd it reached in October, energy ministry data showed on Sunday.

Meanwhile, oil producers in the US continue to churn out record amounts of oil, with crude output at an unprecedented level of more than 11.5 million bpd. With drilling activity still high, most analysts expect US oil production to rise further in 2019.

OIL was jolted higher by efforts across the globe to support prices as Saudi Arabia and Russia extended their pact to manage the market and Canada’s largest producing province ordered unprecedented output curbs.

Prices retreated slightly after Qatar said it was leaving Opec. After their worst month in a decade, futures in New York and London advanced more than 5 per cent on Monday. The Gulf state has also been at loggerheads with its much bigger neighbour Saudi Arabia, the de facto Opec leader.

Although Moscow and Riyadh have yet to confirm any fresh cuts, the agreement by the Russian and Saudi leaders over the weekend opens the door for a deal at the Opec meeting this week in Vienna.

Alberta’s decision to curtail production by 325,000 barrels a day put a rocket under oil’s rally before Qatar’s surprise announcement that it was leaving the producer group to focus on gas.

Prices got a further boost as Donald Trump and his Chinese counterpart Xi Jinping called a truce in their trade dispute, with the US president agreeing to postpone a planned tariff hike on Chinese goods for three months in return for greater purchases of American products.

The pact prompted a rally in riskier assets, including oil, as fears over the economic fallout of the trade war ease. Bullish investors are taking heart that the world’s biggest producers are ready to take action after crude collapsed into a bear market on fears of a glut.

Speculation over whether the Organisation of Petroleum Exporting Countries and its partners will curb output has gripped the market in recent weeks, causing volatility to spike.

While Opec delegates said the Saudi and Russian leaders have given political blessing for an agreement, questions remain, including the size of any potential cut.

“We may see prices recovering to US$60 a barrel this month and depending on how much and until when Opec’s output curbs will continue, we might be heading towards US$70,” Sungchil Will Yun, Seoul-based commodity analyst at HI Investment & Futures, said by phone.

“Canada’s production cuts are adding to the bullish sentiment in the oil market, removing concerns of oversupply that has so far been dampening prices.”

West Texas Intermediate for January delivery climbed as much as US$2.92, or 5.7 per cent, to US$53.85 a barrel on the New York Mercantile Exchange, its biggest intraday gain since June.

The contract traded at US$53.51 at 3.37pm in Seoul, after losing 22 per cent last month. Total volume traded was more than triple the 100-day average. Brent for February settlement rose as much as 5.3 per cent to US$62.60 a barrel on London’s ICE Futures Europe exchange.

With the flurry of bullish news, traders largely discounted Qatar’s surprise announcement that it will leave the Organization of Petroleum Exporting Countries to focus on natural gas.

Opec’s president and the United Arab Emirates Energy Minister Suhail Al Mazrouei said he was optimistic Opec+ will reach an agreement in Vienna over a cut in production for 2019.

Technical teams are working on the level of the cuts necessary and the reference baseline for the reduction, he said. Alberta’s unprecedented curbs, announced on Sunday, are an effort to ease a crisis in the nation’s energy industry.

The province will reduce production of raw crude and bitumen by 8.7 per cent starting in January until the levels of excess oil in storage are drawn down. The reduction would then drop to 95,000 barrels a day until the end of next year at the latest.

The amount being cut is more than the total production of each of Opec’s three smallest members: Equatorial Guinea, Gabon and the Republic of Congo. “It’s always more impactful when everyone joins the fray,” said Stephen Innes, head of Asia-Pacific trading at Oanda Corp.

Alberta’s producers have been particularly battered by crude’s slump amid surging oil-sands output, a shortage of pipeline space and heavy US refinery maintenance.

The province is following the advice of companies like Cenovus Energy and Canadian Natural Resources, which have been hammered by record low prices for heavy Canadian crude.

Meanwhile, Qatar’s energy minister said the country, which accounted for less than 2 per cent of Opec’s production in October, would leave from January and thereafter would not be committed to any agreements by the group.

Accounting for less than 2% of the cartel’s output, the exit will have less of an impact on global supplies but could impact OPEC’s cohesion, Petersen said.

Facebook Comments