Oil Holds Onto OPEC Gains

By Glenn Dyer | More Articles by Glenn Dyer

Oil futures rose for a second day in a row overnight as traders shrugged off second thoughts about the OPEC production cut agreement.

The gain however lost its punch so far as stockmarkets were concerned – Europe sold off, the Dow rose to new highs, but the S&P 500 and the tech heavy Nasdaq fell.

The Nasdaq actually shed more than 1% and was weak for a second day as US investors rotated out of tech stocks (nothing from Trumflation for them and into old fashioned companies seen as benefiting from higher spending).

That was after European markets closed with losses on the day as the surge in oil prices petered out so far as equities were concerned.

Our market will start slightly in the red this morning after yesterday’s solid 1.1% or near 60 point gain for the ASX 200. The Aussie dollar regained the 74 US cent level overnight as the surge in the greenback halted.

In fact the difference in sentiment from 24 hours earlier is quite striking and confirms the dead cat nature bounce from the OPEC production decision, which has yet to be fully explained and nailed down.

US oil futures settled to at their highest level in about six weeks with January West Texas Intermediate crude rising $US1.62, or 3.3%, to settle at $US51.06 a barrel in New York

That was after the previous day’s 9.3% gain. The settlement overnight was the highest settlement since October. 19.

Brent crude futures jumped above $US53 a barrel in London and ended up 3.7% at $US53.76.

Gold though again fell, extending the recent weakness after notching the worst monthly performance in over three years.

Comex February gold dipped $US4.50, or 0.1%, to settle at $US1,169.40 an ounce.

With Wednesday’s close, the front-month gold contract dropped 8% in November, the worst one-month percentage loss since June 2013.

A further worry for gold bugs is the news that China is cracking down on the use of gold trading to shift money out of the country. That news came a day after the country’s government revealed tighter controls on companies investing offshore and using those deals to move money offshore.

Copper prices though leap 19% last month and rose another 0.4% on the first day of the new month to end at $US2.64 a pound on Comex.

And Comex silve rebounded from Wednesday’s slide to close up 2.4 cents, or 0.1%, at just under $US16.51 an ounce. The metal lost 7.6% in November, its biggest monthly drop since August. Silver remains deeply in bear-market territory, which is a 20% drop from the most recent peak.

US analysts say the biggest question for the OPEC agreement remains enforcement, as the organisation has no authority to make its members comply, and no way of punishing them. OPEC members have a long record of cheating by producing beyond their allotted quotas in the past, as they showed after the 2008 agreement which gradually fell apart.

Under this week’s deal, Saudi Arabia is expected to take the lion’s share of the cuts by slashing production by 486,000 barrels a day. Iraq agreed to curb output by 20,000 barrels a day. But struggling producers such as Nigeria and Libya were exempt from the deal as their production has been cut by militant attacks in the past year or so.

Iran was given special leeway to increase production slightly above its October level.

The biggest unanswered question is where the rest of the cut is going to come from. Non-OPEC producers are expected to cut production by a combined 600,000 barrels a day.

Russia confirmed overnight that it would cut production by 300,000 barrels a day, though it isn’t clear how much of that will come from already expected declines. But where will the remaining 300,000 barrels come from.

Mexico has been mentioned, but remains mute, Other non-OPEC members are also silent and the biggest outside Russia, the US, certainly isn’t cutting, it is increasing production.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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