Oil Price Hits 18-month High as Non-OPEC Producers Join Forces

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Saturday’s meeting in Vienna between 11 non-OPEC oil producing nations including Russia and Mexico has led to the first pact between the two groups in 15 years. Joining forces with OPEC’s commitment to reduce output by 1.2 million barrels a day, the non-OPEC 11 committed to reduce their own combined output by another 558,000 bpd from January. In a gesture of solidarity to the historic agreement, Saudi Arabia’s Energy Minister Khalid Al-Falih reiterated the largest crude exporter’s commitment to enforce production cuts. Saudi Arabia would, Al-Falih stated, ensure output reduction targets would be met by cutting substantially “to be below” them.

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Oil prices, which had been gradually slipping back last year after strong gains following the announcement of the OPEC deal have surged again today and by shortly after midday in London brent crude futures had risen by $2.28 to hit $56.61 a barrel. U.S. crude also rose strongly, adding $2.25 to $53.75. At one point this brent crude for January delivery touched $57.89, the highest price seen since July 2015, before dropping back to $56.61. The current level still represents a gain of over 4% and at over 50% up on this time last year today sees the highest year-on-year rise for a particular day since September 2011.

If the agreed cuts are seen to be met in their entirety before production is ramped up elsewhere, most likely by U.S. shale producers, oil prices could reach $61 a barrel next year, according to Goldman Sachs, who have a 2017 price target of $55. However, the investment bank believes that the likelihood of that happening is still doubtful. Barclays also believes that the chances are increased production from elsewhere will mean prices won’t go too much higher than at present, at least for any sustained period of time. In a note this morning the bank said:

Elsewhere in commodities, gold price has dropped to its lowest levels in 10 months today following the rise in oil price and bets that the Federal Reserve will announce rate hikes on Wednesday. A 0.25% rate increase has been priced in by markets already and there is little doubt that will be confirmed. Of more interest is what kind of mood is seen within the Fed with regards to further increases over 2017 and their possible timing and conditions. That is the information market participants will be looking for in Wednesday’s statement, to be delivered at the conclusion of the two-day Fed meeting starting tomorrow.

With U.S. Treasury yields and the U.S. dollar rising, spot gold price fell by 0.2% to $1,555.25 oz, a third consecutive session of losses. Such low prices haven’t been seen since February 5th. U.S. gold futures also lost 0.5% to $1, 156.60 oz., also a 10-month low.

In base metals, prices have dropped back today in London, giving up gains that had been made overnight despite the strong oil price rise. However, sentiment is looking good over the medium term. Commodities broker Marex Spectron stated in a note:

“The base metals market remains in good shape and set for higher levels into year-end and beyond into 2017, both [Chinese] onshore and the western accounts are better to buy so best not fight it.”

Nonetheless, three-month copper price was down $69 on Friday’s close today at $5,757 a tonne, zinc price was down $6, aluminium $10, lead $5 and nickel $180.

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