Crude futures settled sharply higher Wednesday after OPEC producers finalized an agreement at their highly anticipated meeting in Vienna to freeze output at 32.5 million b/d, requiring a collective cut of 1.2 million b/d from current levels.
NYMEX January light sweet crude settled $4.21 higher at $49.44/b, having risen as high as $49.90/b shortly before the end of the trading session. ICE January Brent rose $4.09 to settle at $50.47/b.
The agreement -- OPEC's first coordinated cut since the depths of the financial crisis in 2008 -- was reached after Saudi Arabia agreed to cut its production by 486,000 b/d from its October levels, as estimated by OPEC's secondary sources, to 10.046 million b/d.
Iraq, which had agitated in the weeks leading up to the meeting for an exemption, agreed to cut 209,000 b/d from its October levels to 4.351 million b/d.
Iran, meanwhile, will be allowed to produce 3.797 million b/d, an increase from its October production level of 3.69 million b/d, according to OPEC's secondary source estimates. Iran had long insisted on regaining its pre-sanctions output level of some 4 million b/d before agreeing to any output restraints.
Crude futures jumped overnights as rumors of the agreement swirled and were largely steady throughout the US trading session, but pushed higher after the deal was announced, likely due to the surprise participation of Russia and other non-OPEC countries who agreed to cut 600,000 b/d. Russia agreed to absorb 300,000 b/d of the non-OPEC cut, albeit "gradually," its Energy Ministry said.
"Perhaps most surprising, however, was that this is in addition to an agreement from non-OPEC countries to also cut production by 600,000 b/d, 300,000 b/d of which is to come from Russia," Tony Starkey, a Platts Analytics energy analysis manager, said. "In total, that represents a 1.8 million b/d cut in total crude production, far surpassing anyone's expectations."
In addition to the rally in front-month crude futures, the market's optimism was also reflected in a tightening of the contango market structure.
The front-sixth month NYMEX crude spread narrowed 21 cents to minus $3.29/b, and the same spread for ICE Brent tightened 48 cents to minus $2.93/b.
"We anticipate actual production that will roughly balance the global market for 2017 as a whole, with a residual surplus in the first half and a deficit emerging only in the second half of next year," Tim Evans, energy futures specialist at Citi, as details of the agreement started to emerge.
However, some analysts sounded caution even as futures pushed higher and timespreads narrowed.
"As with all agreements from OPEC, several issues give us pause," analysts at Barclays wrote Wednesday afternoon, citing "fuzzy math" in various OPEC releases, Russia's "mixed record of compliance," and "the compliance by Iran and Iraq with the new targets."
Even as Saudi Arabia agreed to significant production cuts as part of the agreement, traders surveyed by S&P Global Platts expected Saudi Aramco to cut its official selling prices for Asian buyers by up to $1/b.
Steeper discounts for Saudi crude were seen to go hand in hand with its market share strategy over the past two years, though the Asian OSPs often track Dubai crude market structure.
Refined product futures tracked the crude market higher, as NYMEX December RBOB rose 11.37 cents to settle $1.4908/gal and ULSD gained 10.82 cents to end the trading session at $1.5709/gal.
MARKET BRUSHES OFF EIA INVENTORY DATA
While petroleum markets were squarely focused on the events taking place in Vienna, weekly inventory data released by the US Energy Information Administration showed US commercial crude stocks fell 884,000 barrels to 488.145 million barrels in the week ended November 25.
The oil complex seemed unfazed by the weekly data, trading relatively steady after the initial jump as the OPEC rumors started to emerge.
East Coast crude stocks dropped 3.325 million barrels to 14.044 million barrels, but Midwest inventories jumped 3.044 million barrels to 145.964 million barrels to negate the impact.
Within the Midwest, inventories at Cushing, Oklahoma -- delivery point for NYMEX crude contracts -- rose 2.419 million barrels to 61.502 million barrels.
Imports drove the divergence in regional stocks, with East Coast imports falling 243,000 b/d to 568,000 b/d -- the lowest weekly total in over six months -- and Midwest imports rising 272,000 b/d to 3.334 million b/d. Total US crude imports fell 30,000 b/d to 7.548 million b/d, while exports were mostly steady, rising 5,000 b/d to 474,000 b/d.
While crude stocks drew marginally, US gasoline stocks rose 2.097 million barrels to 226.123 million barrels, while ULSD stocks jumped 4.637 million barrels to 130.231 million barrels, surpassing analysts' expectations.
While the two major refined products posted stock builds, draws for other refined products meant that total US petroleum and refined product inventories rose just 466,000 barrels to 1.341 billion barrels.
