Rising Oil Futures Aim for Weekly Gains

After experiencing a slump in the previous session, oil futures are making a recovery and are on track for weekly gains. The outcome of the highly anticipated OPEC+ meeting has left traders uncertain about whether producers will fully implement additional production cuts.

Price Action

• West Texas Intermediate crude for January delivery rose by 19 cents, or 0.3%, to $76.15 a barrel on the New York Mercantile Exchange. It is set to achieve a weekly rise of 0.8%.
• February Brent crude, the global benchmark, increased by 15 cents, or 0.2%, to $81.01 a barrel on ICE Futures Europe. It is headed for a 0.7% weekly rise.

Market Drivers

The slump in crude prices on Thursday followed the agreement made by OPEC+ producers to cut approximately 2.2 million barrels per day (bpd) of crude from the market in the first quarter of next year. This figure includes the widely expected extension of Saudi Arabia's voluntary cut of 1 mbd and Russia's 300,000 barrel per day reduction in crude supplies.

However, traders were disappointed by the additional cuts, as they were left to be announced by individual members. There are concerns regarding the enforcement of these reductions by smaller producers and their voluntary nature.

OPEC+ Voluntary Cuts and Market Speculation

Analysts at Sevens Report Research suggest that the lack of clarity on all OPEC+ voluntary cuts had a modestly bearish impact on the market. This uncertainty is believed to be the main reason behind the market's decline after the meeting.

However, amidst this uncertainty, there were also some constructive developments. Helima Croft, the global head of commodity strategy at RBC Capital Markets, highlights a language in the OPEC+ statement that suggests the voluntary cuts will be gradually wound down based on market conditions.

Prior to the meeting, there was speculation regarding Saudi Arabia potentially scaling back its 1 mbd cut in January to regain market share. Croft explains that the additional timing language in the statement is an attempt to dispel such speculation. It shows that Saudi Arabia does not intend to flood the market with additional barrels in the near future.

There have been other significant developments as well. Brazil has announced its plans to join OPEC+ in January. Should the South American producer eventually agree to collective output management, this could have important medium-term implications. Brazil aims to reach a production level of 5.4 mbd by the end of the decade, representing a growth of around 2 mbd from current levels. It is considered one of the major sources of non-OPEC supply growth in the medium term.