By Jillian Ambrose, The Telegraph |
The oil market’s tentative recovery has hit a setback as niggling concerns over Opec’s plans to cut supply punctured growing market optimism.
The market enjoyed its strongest rally in six weeks on Thursday, taking the price of Brent crude to almost $56.50 a barrel, but as market jitters re-emerged the price tumbled back over $1 to $55.30.
Earlier in the week the market was emboldened by fresh data suggesting deeper than expected oil supply cuts from Saudi Arabia, one of the world’s biggest oil producers, and spurred on by a weaker dollar following president elect Donald Trump’s first press conference.
The Saudis are reported to have exceeded the level of cuts agreed in the landmark supply deal and are producing less than 10 million barrels of oil a day, which suggests a cut of 625,000 barrels rather than the agreed 500,000 barrel slowdown.
An investment note from brokerage Cenkos said: “This would suggest that Saudi is willing to wear the pain of short-term cuts over and above agreed quotas in order to absorb Libyan increases and thus preserve longer-term prices.”
Libya has been exempted from the Organisation of Petroleum Exporting Countries’ supply cuts as the battered North African nation tries to get its industry back on its feet.
But traders still harbour concerns over whether the deal struck late last year between Opec and the world’s largest producers outside of the cartel will stick.
Saxo Bank’s Ole Hansen said the short-lived price rally had been followed by a sell-off as traders tried to make sense of a range of supply news.
“Key Opec members have cut production as promised but against this we have doubts about Iraq as well as rising production from Libya and an upgrade to US production,” he explained.
Iraq claims to have cut daily production by 160,000 barrels to reach its target of 210,000 barrels a day soon. But ship loading data from the country suggests that exports in February will be higher. In addition the Kurdish-controlled north has not shown any signs of cutting, leaving it to the government-controlled south to provide the cuts, Mr Hansen added.
Oil prices have climbed from 12-year lows of $27.50 a barrel a year ago but have struggled to reach the key $60 a barrel mark without an intervention from Opec.
The cartel’s agreement to reduce supply alongside cuts from Russia is the first of its kind agreed in 15 years and is crucial to help the market continue its tentative recovery following the two-year downturn.
A report from the cartel’s Vienna-based headquarters issued a sobering warning that without the deal, the market could face a supply overhang of 1.24m barrels of oil a day, around 300,000 more than forecast a month ago, which would snuff out the market’s hard-fought recovery.