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MNI ANALYSIS: After O/N Slide On OPEC News, WTI Nears $59

Repeats Story Initially Transmitted at 17:00 GMT Dec 1/12:00 EST Dec 1
--Analysts Express Doubt About A Sustained Push Over $60, Eye 2018 OPEC/non-OPEC
Adherence, US Production
By Vicki Schmelzer
     NEW YORK (MNI)   - West Texas Intermediate crude oil prices have recovered
from an initial knee-jerk slide in response to OPEC and non-OPEC members'
decision to extend production cuts by nine months, to the end of 2018, which was
generally in line with expectations.
     Nevertheless, even with the front WTI contract recovering to test highs
near $59 per barrel earlier Friday, it is far too soon to tell if crude is
merely trading on the high side of a $50-$60 range, or is preparing to vault the
psychological $60 mark on a more sustained basis. 
     In a meeting overview, released earlier Friday, OPEC stated that "the
Conference took note of oil market developments since it last met in Vienna on
25 May 2017, and reviewed the oil market outlook for the remainder of 2017 and
2018" and "observed that global economic growth forecasts had improved since
May, with expectations for both 2017 and 2018 now at 3.7%."
     "In addition, global oil demand has been robust with upward revisions since
May, with oil demand growth now standing above 1.5 million barrels a day (mb/d)
for both 2017 and 2018," OPEC said.
     There was also evidence that market rebalancing "has gathered pace since
May, with the OECD stock overhang falling to around 140 million barrels above
the five year-average for October, a drop of almost 140mb since May," the OPEC
statement said. 
     In addition, over this period, "crude in floating storage has declined
significantly also," the statement said.
     Nevertheless, "the Conference reiterated that it was vital that stocks be
drawn down to normal levels," OPEC said as explanation for the production-cut
extension. 
     Barclays commodity strategists Michael Cohen and Warren Russell said the
extension could present upside risk to their price target for the second half of
2018, given that "adherence to the 2017 quota levels beyond Q1 18 for OPEC and
Russia will create a fundamentally tighter balance by around 400kb/d (all else
equal)."
     (Ahead of the OPEC decision, Barclays had looked for Brent prices to
"remain elevated" above $60 per day on the quarter and then to move lower to $55
per barrel in 2018.) 
     However, Barclays looked for this balance tightness to be offset by
increased shale production, "which could grow by an additional 400-500kb/d if
WTI averages $60/bbl." 
     The OPEC/non-OPEC members' latest decision has clear benefits for U.S. oil
producers, which "have already reaped the benefits of OPEC's initial decision to
cut production," the strategists said. 
     EIA data, released Thursday, showed that U.S. crude oil production stood at
9,481 thousand barrels per day in September, up 290 kb/d over August and more
than 900 kb/d above September 2016 levels. September data compares to the 9,626
kb/day seen in April 2015, which was the highest production since the early
1970s. 
     In its Short-Term Energy Outlook, released earlier in November, the EIA
forecast that total U.S. crude oil production should "average 9.2 million b/d
for all of 2017 and 9.9 million b/d in 2018, which would mark the highest annual
average production, surpassing the previous record of 9.6 million b/d set in
1970."
     In the STEO, the EIA forecast that Brent would average $56 per barrel in
2018 and that WTI would average "almost $5 per barrel lower than Brent prices in
2018."
     But, if instead crude oil prices remain buoyant going forward, U.S
producers "will likely continue to put rigs back to work and drive output
higher," Barclays Cohen and Russell said. 
     "We forecast U.S. production to grow by another 1 mb/d before 2018 end, but
there is clear upside risk to this forecast if current oil prices persist," the
strategists said. 
     Carl Weinberg, chief global economist at High Frequency Economics in
Valhalla, NY, remained doubtful of a more sizable underpinning impact from the
latest OPEC/non-OPEC agreement. 
     Even being "generous" and saying the "OPEC-orchestrated 'deal' has reduced
supply by a million barrels per day, and if we were to guess that tight oil
production in the United States alone has offset at least half that reduction,
then the 'deal' is reducing the supply for crude oil by about 500,000 barrels
per day compared to the summer of 2016," Weinberg said.
     "At that pace, it will take two years to work off excess stockpiles of
crude until 'normal' levels are achieved again," he said. 
     Still high inventories make it difficult to "support prices like $62 per
barrel for Brent," which could mean a "drop back to or below $50 per barrel" at
some point, Weinberg observed. 
     On the U.S. front, a move below $50 per barrel is expected to prompt tight
oil producers to shut down facilities, although "it will take six to 12 months
for the sector to close the spigot once the price threshold has been crossed,"
he said. 
     However, "the biggest medium-term risk for the oil market right now is that
rising U.S. dollar interest rates will raise the cost of financing those huge
inventories," he said. 
     "Stockpiles this big may make financial sense when interest rates are zero,
but not when short-term rates start to rise," Weinberg said, adding that "Higher
financing costs can, and we think will, bring a lot of stockpiled oil to market
at clearance prices." 
     NYMEX January light sweet crude oil futures were trading at $58.50 per
barrel Friday at 12:00 pm ET, on the high side of a $57.29 to $58.88 range. Last
week, on Nov. 24, WTI topped out at $59.05. 
     The last time crude traded above $60 per barrel was in June 2015, when the
front contract hit a high of $61.82 that month. In 2015, WTI posted a yearly
high of $62.58 May 6 only to close the year around $37. 
--MNI New York Bureau; tel: +1 212-669-6438; email: vicki.schmelzer@marketnews.com

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