Crude oil futures rallied to their strongest level in 18 months on Tuesday, then gave up most of the gains on no obvious news. The major US stock-market indexes also fell before recovering later in the afternoon.
An agreement between the Organization of Petroleum Exporting Countries (OPEC) and some non-members to reduce their output kicked in on January 1. In November, OPEC reached its first production deal in eight years, vowing to lower output by 1.2 million barrels a day to boost prices.
Crude oil rallied after the announcement, and finished 2016 up by 45%, its biggest annual gain since 2009.
On Tuesday, West Texas Intermediate crude oil futures, the US benchmark, gained as much as 2.4% to $55.01 per barrel, before slumping 1% to trade near $53.17. Brent crude, the international benchmark, rose 2.3% to as high as $58.15.
Whether OPEC members will stick to their production limits is uncertain. In a statement on Monday, Saudi Arabia’s cabinet urged OPEC members to implement their agreement, according to Reuters.
“Market sentiment is likely to hinge entirely on the compliance of OPEC and non-OPEC nations as well as the capability of exempt countries (Libya, Nigeria) to increase production,” said Accendo Markets’ Mike van Dulken in a note.
Also, higher oil prices have encouraged US shale drillers to ramp up production. The count of active oil rigs rose last week for a ninth straight week, increasing the combined tally to the highest level in one year, according to Baker Hughes.
“A US production hike would offset some of the production cut and effectively earn more market share,” said Jason Pride, director of investment strategy at Glenmede, in a note. “As prices rise, US drillers will boost supply, limiting price increases beyond $60 per barrel.”
- Markets Insider