Brent oil rallies as hopes grow OPEC will extend output deal

Brent weekly chart

The price of the European benchmark oil blend rose to its highest level since the summer of 2015, amid signs that the worldwide glut of supply may start to dissipate.

OPEC and 10 producers outside the cartel, including Russian Federation, first agreed late a year ago to cap their production at around 1.8 million barrels a day with the aim of alleviating global oversupply and boosting prices.

"Oil ministers were patting themselves on the back in Vienna, and perhaps rightly so". Not everyone agrees. Oil producers have been stepping up hedging activity as 2018 WTI prices rose above US$50 a barrel, according to analysts from Citigroup and BNP Paribas. Those stockpiles had fallen to only 35 million barrels above the five-year average versus the 219 million barrels it was above that mark in the previous month.

In the short term, much of the difference can be explained by the effects of hurricanes Harvey and Irma, which disrupted oil refineries and transportation along the US Gulf Coast. However, the United States energy industry already appears to be rebounding quickly.

Puerto Rico was devastated by the impact of Irma and Hurricane Maria, which hit the USA island territory as a Category 4 storm.

If the 158-year history of the oil industry has taught us anything, though, it is surely that innovation is one thing it is very good at.

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Elsewhere, in the USA, market participants mulled over data showing the number of oil rigs continued to decline, suggesting a possible tightening in domestic production.

"If we break above $60, I believe that we will hold above it for the rest of the year", Tamas Varga, an analyst at PVM Oil Associates Ltd, said by phone from London. These figures confirm beyond all reasonable doubt that the market is rebalancing.

After its fifth meeting in Vienna yesterday, OPEC and non-OPEC members said in a statement that the participating members in the agreement have reached a conformity level of 116 per cent in August, the highest since the agreement was reached in November 2016. "In this regard, we urge participating countries to achieve 100 per cent conformity without further delay. All options are left open to ensure that every effort is made to rebalance the market for the benefit of all".

"Demand growth remains robust, with the projected 2mb/d in 2H17 on course to materialize". Compliance with the agreed upon production cuts jumped at the end of this summer, which also coincided with an unexpected drop in Libya's output. All factors point to headwinds ahead. "Supported by the improving forward structure in the futures market, floating storage has also been on a declining trend since June", OPEC said.

Front month Nymex crude for November delivery entered bull-market territory Monday, rising more than 3% to $52.22. That led the IEA to upwardly revise its growth estimate for the full year.

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