After OPEC deal, oil expected to rally - for the moment

By Markets Reuters

  • A soldier patrols in front of the headquarters of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Austria, November 29, 2016. REUTERS/Heinz-Peter Bader

    A soldier patrols in front of the headquarters of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Austria, November 29, 2016. REUTERS/Heinz-Peter Bader (Copyright Reuters 2016)

  • A soldier patrols in front of the headquarters of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Austria, November 29, 2016. REUTERS/Heinz-Peter Bader

    A soldier patrols in front of the headquarters of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Austria, November 29, 2016. REUTERS/Heinz-Peter Bader (Copyright Reuters 2016)

Oil's blistering rally of up to 10 percent to $50 a barrel on Wednesday should continue into next week, analysts and fund managers said, after the world's top producers announced a historic deal to rein in output.

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The Organization of the Petroleum Exporting Countries reached its first deal to cut oil output since 2008 - signaling its return to managing supply in world markets.

The path ahead for the oil market, however, is expected to be volatile, as those who positioned for a rally unwind their trades to book profits. The possibility that OPEC will be unable to meet its commitment to cut production could also undermine prices as well.

That makes the long-term path for oil more uncertain, as few expect the commodity to reach $60 a barrel soon.

"You're going to get a few days of fluctuations," Paul Mumford, fund manager at Cavendish Asset Management said.

"Nothing goes up in straight lines and people do like to take profits when big moves like this occur."

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Oil prices soared to their highest in over a month on the news of the deal, with global benchmark Brent crude futures plowing through the $50 a barrel, clinching their biggest daily percentage gains since February. [O/R]

Speculators piled into crude oil options and futures in the days ahead of the OPEC meeting. Volumes in call options that allow the holder to buy January crude futures at $60 per barrel soared to a record a day ahead of the meeting.

As these positions are unwound, oil prices could see some selling, market participants said.

From a technical perspective, for Brent crude to show a bullish trend, prices must rally above $53.70, while U.S. crude West Texas Intermediate (WTI) futures would need to surpass $49.85, analysts said.

Brent ended Wednesday's session at $50.47, up $4.09 or 8.8 percent, after hitting an intraday high of $50.49. WTI settled at $49.44, up $4.21, or 9.3 percent with a session high of $49.90,

"I think prices will continue to rally and we could see it move up to that $51.20 and maybe even the $53.60 a barrel level," Dean Rogers, senior analyst at Kase & Co, said.

"The reality is if prices are above $50, people are going to turn wells back on, they're going to start drilling and so the market could, as reality sets back in over the next few weeks, settle back into that $10 range we've been in since summer."

U.S. shale producers are poised to benefit the most - if their production increases, it could offset OPEC's efforts.

"We anticipate oil prices will likely remain rangebound between $50 and $60 per barrel over the next few years," said Rob Thummel, portfolio manager at Tortoise Capital, which has $15 billion in energy assets.

Brent's recent high in October was $53.70, and movement above that point would signal that a further rally is possible, said Fawad Razaqzada, a market analyst at forex.com.

WTI could rally to as much as $59 a barrel over the next few weeks after surpassing $49.85 a barrel, said Walter Zimmerman, chief technical analyst at ICAP. That $49.85 a barrel level represents the Fibonnaci 78.62 retracement of last decline from October to November, Zimmerman said. The market may first pull back, as traders adjust their positions, he said.

(Reporting by Devika Krishna Kumar and Jessica Resnick-Ault; Editing by Marguerita Choy)