Oil prices rose to a three-week high Monday as investors continued to bet that the Organization of the Petroleum Exporting Countries will reach a production deal at the end of the month.
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Light, sweet crude for December delivery settled up $1.80, or 3.9%, to $47.49 a barrel on the New York Mercantile Exchange, closing at the highest level since Oct. 28. Brent, the global benchmark, settled up $2.04, or 4.4% at $48.90 a barrel.
Prices were buoyed by news that the energy ministers from two of OPEC's most reluctant members in terms of cutting output, Iraq and Iran, are backing the proposal. The cartel meets Nov. 30 when it will formally decide on strategy for the first half of 2017.
"It's all adding up to where people are a little bit more bullish," said Donald Morton, senior vice president at Herbert J. Sims Co., who runs an energy-trading desk. "Everybody wants to turn into a buyer."
The change in sentiment marks a one-week turnaround for crude oil, as skepticism over OPEC's ability to come to a deal has tempered.
Analysts have also become more positive on the outlook for a production cut. On Monday, Goldman Sachs raised the forecast for oil prices in the first half of 2017, given expectations that OPEC will announce and implement a production cut. A Bank of America Merrill Lynch research report also noted that a supply cut looks highly probable.
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However, "political risks can still derail an otherwise economically sound decision," Goldman Sachs analysts wrote. While the market largely expects OPEC to cut production, some remain cautious going into the meeting.
"Their track record is horrendous," said Mark Waggoner, president of Excel Futures. "Somebody makes another statement, things could change."
Traders also noted that any shift in expectations could lead to heightened volatility before the meeting, especially given the holiday week and less activity in the market.
Should OPEC decide against a production cut, oil prices face headwinds such as a strengthening U.S. dollar, high production levels and growing crude-oil stockpiles. These challenges could make a production cut more difficult for the cartel, Barclays analysts wrote in a note this week.
Cutting production would give prices a short-term boost, but it would be U.S. producers that reap the benefit in the midterm, by using the fillip to lock in higher prices for future production, the bank said.
"We still expect OPEC to agree to a face-saving statement. It would showcase agreement, provide flexibility, and not veer too far from what countries had planned initially for [the first half of 2017]," said Barclays. "Should a credible deal prove out of reach, only the normal uptick in winter demand could save the market from declining further."
While the absence of a deal would be bearish for oil prices, Morgan Stanley analysts said the downside risk for OPEC not agreeing to cuts is limited since a "fair amount of skepticism" has already been priced in.
Gasoline futures settled up 4.3% at $1.3965 a gallon and diesel futures settled up 4.6% at $1.5245 a gallon.