By Barani Krishnan
Investing.com - Oil prices rose for a second day in a row as OPEC and its allies managed to announce a production hike without scaring the market — a development that underscored the cartel was finally learning from past mistakes.
The 13 member Saudi-steered Organization of Petroleum Exporting Countries and 10 allies led by Russia agreed to increase production by 500,000 barrels per day beginning in January after days of tense discussions. This will bring the total production cuts at the start of 2021 to 7.2 million barrels per day.
Crude prices rose, albeit modestly, on the deal, instead of falling, as the oil production group managed to exhibit a market sensitivity atypical of its past. Just a couple of years ago, it would not have been surprising to see OPEC add a million barrels to production on a $10 price hike, only to see the market crash $20 later.
New York-traded West Texas Intermediate, the leading indicator for U.S. crude, settled up 36 cents, or 0.6%, at $45.64 per barrel. WTI rose 1.6% in the previous session, after posting a 27% gain for November, its best since May, on investor bets that the world might soon be free of the coronavirus, with mitigating vaccines poised arrive to arrive in coming weeks.
London’s Brent, the global benchmark for oil, finished Thursday’s trade at $48.71, up 46 cents, or almost 1%, after Wednesday’s 1.8% gain. For November, Brent rose 28%, its best month since a 95% hike in May from April’s lows.
“OPEC+ at all costs needed to avoid a taper tantrum, so a small hike in January was acceptable for the Saudis. A monthly increase of 500,000 barrels per day in January will replace the 1.9 million increase that is currently in place,” said Ed Moya, analyst at New York’s OANDA.
“OPEC+ will decide monthly on how much more oil should come online. OPEC+ avoided oversupply concerns, as a 0.5 million increase in output allows stockpiles to decline over the next few months. If the global economic recovery is stronger than expected, you can expect to see terrible compliance next year and eventually the OPEC+ pact will be terminated.”
Indeed, the half-million barrel adjustment appears to be a well-calculated hedge for OPEC+ to pull back at anytime.
If anything, the Covid-19 pandemic has enabled OPEC to be more nimble than any other time in its six-decade history. It can pull together a Zoom meeting at a couple of days’ notice now, versus the old days when it would take months at a time for the group to convene in Vienna or some other capital of consensus.
Another positive thing for the cartel on Thursday was Iran’s tacit agreement to go with any deal struck by the group’s leadership, though Tehran itself won’t have an active role given the prevailing Trump administration sanctions against the Islamic republic.
Iran needs to be watched carefully as it could be the next shoe to drop within OPEC, depending how quickly the Biden administration lifts those sanctions and how much Tehran will add to supply in the near-term.
Saudi Energy Minister Abdulaziz Salman, who leads OPEC, even seemed unperturbed Thursday by Libya’s galloping production.
For now, it appears that OPEC has learned from past mistakes and is confident about managing any supply overruns that come in the near-term.