Oil rises toward $50 a barrel after OPEC+ supply compromise

Daniel Fowler
December 4, 2020

Oil prices on Thursday were on track to hit their highest closes since early March after sources said OPEC and Russian Federation agreed to a modest output increase of 500,000 barrels per day (bpd) from January onwards.

In light of the current oil market fundamentals and the outlook for 2021, OPEC+ agreed, beginning in January 2021, to adjust production by 500,000 bpd, according to an OPEC statement released after the 12th OPEC and non-OPEC Ministerial Meeting.

The oil producers decided in May to reduce production by 7.7 million barrels, or 8 percent of global demand.

"The market rallied to multi-month highs on demand expectations from the vaccine and stimulus, not from OPEC's management of supply", said Robert Yawger, director of energy futures at Mizuho.

The oil group also agreed to hold monthly ministerial meetings, starting January 2021, to decide on further production adjustments for the following month, with monthly adjustments being no more than 500,000 million bpd.

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Oil producing countries face a hard situation.

Saudi Energy Minister Prince Abdulaziz bin Salman said the meeting was hard due to differences between many members.

Brent crude oil, the worldwide standard, traded up 30 cents at $48.55 per barrel while West Texas Intermediate crude oil added 19 cents to $45.47 per barrel. "For two or three days I threw in the towel, but the towel comes back to me", said Prince Abdulaziz.

Monthly meetings by OPEC+ will make price moves more volatile and complicate hedging by USA oil producers. Every US$1 per barrel increase in oil prices would add about RM300 million to Malaysia's revenue. "But we are hoping that this new wave would be short lived". "If this momentum continues, we could actually see the oversupply disappear a lot earlier than what we're expecting". "As prices go up, hedging will increase", said Gary Ross, co-founder of BlackGold Investors. "So there are clearly some oversupply risks", said Ross.

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