Oil futures moved
sharply higher on Tuesday on hopes OPEC’s deal to cut production that set in on
Sunday will help to stabilize the market in 2017. February West Texas
Intermediate crude CLG7, +1.25% jumped $1.11, or 2.1%, to $54.82, setting it on track for its
highest settlement since July 2015. March Brent LCOH7, +1.23% on the ICE Futures exchange in London climbed $1.17, or 2.1%, to
$57.99 a barrel.
The sharp gains
come after a solid 2016, when the U.S. benchmark futures contract saw a nearly 45% calendar-year rise, its biggest
annual rise since 2009. The advance was fueled in part by expectations members
of the Organization of the Petroleum Exporting Countries and other major
producers will abide by an agreement to curb output. The output quotas kicked
in on January 1, 2017 and market observers are now waiting to see if both OPEC
and non-OPEC producers will stick to their part of the deal.
“Prices
have been supported by early indications of countries following through on OPEC
cut commitments, as Oman and Kuwait announced reduction plans,” said Robbie Frasier, commodity analyst at
Schneider Electric, in a Tuesday note. “Indications of
cheating—a major issue in past deals—would prove to be a significantly bearish
factor,” he said. “While every country will be
under the market’s microscope, Iran, Iraq, Saudi Arabia, and Russia remain the
key countries to watch.”
But analysts
Commerzbank said that “firm indications of whether OPEC
is really serious about cutting production won't be apparent until the end of
the month when the production surveys for January are released. Until then,
prices could remain at their exaggerated level. What’s more, the higher price
level is making shale oil drilling in the U.S. attractive again.”
Oil investors were
also looking to China where data that showed the manufacturing sector expanded
faster than expected in December. The Caixin manufacturing purchasing managers
index rose to 51.9 from 50.9 in November, avoiding
contraction territory for a sixth straight month.
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