OPEC deal reached. Now comes the hardest part.

By Azernews

By Gulgiz Muradova

It finally happened. The OPEC and Russia, the major oil producer outside the cartel, agreed to stem production last week giving producers and investors a hope that prices can begin to recover after the two-year fall.

The deal first since 2008 pushed the prices up and crude rose above $55 a barrel to hit a 16-month high on December 5. However, still there’s no guarantee the prices will keep rising, as other market forces are at play.

By 11:15 a.m. Eastern [1615 GMT], Brent crude LCOc1 rose 49 cents to $54.95 a barrel, a 0.9 percent gain, after hitting $55.33, its highest since July 2015, Reuters reported. U.S. crude West Texas Intermediate (WTI) CLc1 futures rose 23 cents to $51.91 a barrel, a 0.5 percent gain. WTI traded at a peak point for the day of $52.42, also the highest since July 2015.

The price of a barrel of Azeri Light crude oil increased $0.91 to stand at $55.95 on the world markets.

After the oil supply glut gathered momentum, it has become urgent to bring all oil players together, both OPEC and non-OPEC members, to reach a consensus.

Today’s glut is mainly attributed to OPEC overproduction, and most notably to Iran and Saudi Arabia, which have been raising production ahead of output talks. The record output levels from OPEC, and the world’s top two oil producers, Russia and Saudi Arabia, saturated oil markets to record levels, crushing prices down to the mid-$20s level in January, though they later recovered into the $40s range.

Many analysts regard OPEC’s production cut as constructive for the market in the near term, but the issue is that American producers are ready to bring more oil to the market, in case oil prices rise significantly.

American shale producers are taking advantage of the post-OPEC rally to hedge their oil price risk for next year and 2018 above $50 a barrel, bankers, merchants and brokers said, pushing the forward oil curve upside down, Bloomberg reports.

The rush to hedge -- locking in future cash flows and sales prices -- could translate into higher U.S. oil production next year, offsetting the long-awaited OPEC deal. Since May, the number of active oil rigs in North America jumped by 50 percent to 474, as of November 23.

On the demand side, higher prices could spell trouble in emerging countries whose currencies have weakened against the U.S. dollar in recent months, especially since Donald Trump won the presidential election. Because oil is priced in dollars, it’s become more expensive in China and India, the second and third largest oil consumers following the U.S, Forbes reports.

The third issue keeping pressure on the possible higher prices is doubt about whether OPEC and Russia will continue to curb supply when the deal ends in six months, as no one knows what’s going to happen then.

The OPEC deal aims to reduce production by 1.2 million barrels a day, or about 1 percent of global output. Russia has also agreed to trim production - by about 300,000 barrels a day - the first time it’s cooperated with the OPEC since 2001.

Some investors are understandably cautious, as the cartel, which controls a third of all oil production, doesn’t have the authority to enforce compliance from its 14 member-nations.

Meanwhile, non-OPEC producers are expected to agree to add an output cut of 600,000 bpd in Vienna on December 10. The invited countries are Russia, Mexico, Oman, Kazakhstan, Bahrain, Colombia, Congo, Egypt, Trinidad and Tobago, Turkmenistan, Azerbaijan, Bolivia, Brunei and Uzbekistan.

Some analysts remain skeptical that non-OPEC producers will line up to pledge their own reductions when OPEC’s announcement last week already largely took responsibility for rebalancing the market.

Still the deal reached after the long talks has the potential to balance the market, as long as everybody sticks to it.

Now, it’s up to producing countries to make good on their pledges to actually cut oil output.