Oil prices rose yesterday to their highest this month as a growing consensus emerged in the market that Opec would overcome internal disputes and scepticism to strike a deal that materially reduces crude output.
Some warned a failure by the Organisation of the Petroleum Exporting Countries to reach agreement at a November 30 meeting, or, more importantly to implement it, would send prices crashing as a two-year glut of crude remained unabated.
Many in the market think Opec would harm its reputation if a deal were not struck and so focus has shifted to which countries would bear the brunt of the cuts, when exactly the global market could become balanced and how the cartel could raise prices without triggering a burst in US shale oil output.
Brent crude oil futures were up 22 cents a barrel at $49.12 by 1212 GMT, having earlier risen $1 in a push against the $50 mark for the first time since the end of October.
US West Texas Intermediate (WTI) crude futures were up 14 cents at $48.38 a barrel.
Oil market is likely to remain oversupplied
Prices were boosted by comments from a Nigerian official attending an Opec technical meeting, which is trying to hammer out details of a deal, that it was likely all countries would be “on board” by the end of the day.
Opec is trying to bring its 14 member and non-Opec producer Russia to agree on a coordinated cut to prop up the market by bringing production into line with consumption.
It said that by the end of September it aimed to cut production to between 32.5 million and 33 million barrels per day compared to its recent record output of around 33.8 million bpd.
Doubts weighed over whether Saudi Arabia and Iran could put their geopolitical disputes aside and whether countries whose finances are in dire straits due to low oil prices would resist the urge to pump crude at high rates.
“We have all along expected that Opec would strike a deal as failure would have further removed its credibility,” said Ole Hansen, head of commodity research at Saxo Bank.
“Once the dust settles and a deal has been reached, the market may want to see whether the cartel is able, for the first time in years, to comply with its own stated production targets.
While a ceiling for overall Opec production may be agreed by November 30, it is unclear whether clear quotas per member state would be set. Some countries, such as Nigeria, Iraq, Libya and Iran, argue they should be exempt because their output has been hit by conflict or sanctions.
“Ultimately, it looks as if Saudi Arabia and its allied Gulf neighbours will reduce production on their own,” analysts at Commerzbank said.
“No ground-breaking agreement on production caps or cuts should be expected from the Opec meeting. The oil market is likely to remain oversupplied for some time yet even after the Opec meeting, especially since US oil production will soon start rising again.”