How Can Oil Remain On The Upside?

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Summary

On Friday, oil prices increased by more than 2% as markets remained bullish on the outcome of the OPEC – non OPEC committee meeting.

Alexander Novak and Khalid Al Falih remain bullish on the OPEC-non OPEC oil deal.

Saudi Arabia, Russia, Kuwait, Algeria, Venezuela, UAE and Oman are all sticking to their commitment on production cuts.

In my earlier article, I had stated that January 22 could be crucial for oil prices as the OPEC-non OPEC committee meeting would bring out new information on production cuts. On Friday, oil prices increased by more than 2% as markets remained bullish on the outcome of the OPEC - non OPEC committee meeting. The WTI and Brent were trading at $53.22 and $55.49 respectively at the time of writing this article. "The petroleum markets are moving higher in Friday trade on the latest round of positive talk about how much supply oil producers have taken offline ahead of Sunday's review by OPEC and non-OPEC representatives in Vienna," said Tim Evans of Citi Futures. Investors must note that oil prices (NYSEARCA:USO) (NYSEARCA:OIL) (NYSEARCA:UWTI) (DWTI) (NYSEARCA:SCO) (NYSEARCA:BNO) (NYSEARCA:DBO) increased in spite of the rising U.S oil production and rising U.S crude oil inventories.

OPEC and non-OPEC joint committee met in Vienna on Sunday - What their key people have to say?

On Sunday, January 22nd, Russia's energy minister - Alexander Novak said something that will support oil prices in the coming week. He said that OPEC and major non - OPEC members were very close to reducing their combined oil production by 1.8 million barrels per day. The energy minister said that almost 1.5 million barrels per day of crude oil had been cut as of late January , with many countries ( like Saudi Arabia) exceeding their production cuts. He also said that the group can reduce its output by around 1.7 million barrels per day by the end of January. "Russia has cut its oil output by around 100,000 barrels per day, double of what was originally planned. Everyone sees that the agreements on oil production cuts have already had a positive effect on oil markets. The market has become more stable and predictable", said Novak. Under the oil deal, Russia had agreed to reduce its output by 300,000 barrels per day by April or May 2017. Even Saudi Arabia's oil minister remained bullish on the oil deal. "The Kingdom [of Saudi Arabia] has taken the initiative and other countries took part in very significant actions. Despite demand usually being lower in the first quarter in winter, the actions taken by the Kingdom and many other countries has impacted the market in a tangible way and we have seen the impact in spot prices. [There are] no surprises so far in terms of demand or supply from other sources so there is no reason for us to suddenly come in January and say we need a bigger reduction or a longer period. Saudi Arabia is producing slightly below 10 million barrels per day and has informed buyers of substantial cuts scheduled for next month", said Al Falih. With this statement, it is pretty clear that Saudi Arabia will reduce its oil production even in February 2017. The committee members also said that rising U.S shale output will be absorbed by the rising global demand for crude oil. Investors must note that even Venezuela (which was earlier giving mixed signals on its production cuts) has managed to achieve more than 50% of its planned production cut of 95,000 barrels per day. However, there was no further information on oil production from Iraq (which was a bit surprising to me) at the time of writing this article.

Takeaway for Investors

For oil prices to remain on the upside, it is extremely important that OPEC and non- OPEC members stick to their agreement and remain consistent in their actions on supply cuts. Looking at the current situation, it is clear that the major stakeholders - Saudi Arabia, Russia, Kuwait, Algeria, Venezuela, UAE and Oman are ( so far) sticking to their commitment on production cuts. This is definitely a bullish development that will have a positive impact on oil price in the near future, especially when the U.S oil production is increasing again and when OPEC members like Nigeria and Libya (who are exempted from the oil deal) may increase their oil production. Investors must take note of this.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.