Oil Up On Signs of Widespread OPEC Deal Compliance

Oil prices rose Friday after a top energy watchdog said exporters are following through on promises to cut oil production to end a longstanding glut in the market.

The International Energy Agency reported Friday that production from the Organization of the Petroleum Exporting Countries fell to 32.06 million b/d in January, a decline of about 1 million b/d compared with OPEC's October baseline. The cut "is certainly one of the deepest in the history of OPEC," the agency said, with the countries that agreed to it reaching a record compliance of 90%.

Light, sweet crude for March delivery gained 86 cents, or 1.6%, to $53.86 a barrel on the New York Mercantile Exchange. Most of the price gains came overnight after the IEA released its report during European trading, and then prices stayed mostly flat during traditional U.S. trading hours. The gains pushed oil to its ninth winning week in the last 13, up 3 cents, or 0.1%.

Brent, the global benchmark, settled up $1.07, or 1.9%, at $56.70 a barrel. It still ended the week down 11 cents, or 0.2%, snapping a three-week winning streak.

OPEC's early compliance rate came in beyond what many, even some of the most bullish analysts and traders, had expected. OPEC has a history of falling short of the cutbacks it promised in past deals, but analysts Friday said that IEA report undermined any predictions that OPEC members might fall short again.

"OPEC cuts are real," analysts at energy investment bank Tudor, Pickering, Holt & Co. in Houston said about the report in their morning note to clients. "The 'OPEC always cheats' crowd can take a seat."

OPEC on Nov. 30 agreed to cut production in January by 1.2 million barrels a day, aiming to limit supply and raise prices. In December, Russia and other producers outside the group committed to take 558,000 b/d out of the market.

Overall global oil supplies plunged nearly 1.5 million b/d in January, the IEA said. Saudi Arabia, Qatar and Angola cut more than they had pledged. Saudi Arabia, the world's largest oil exporter, reduced production by 560,000 b/d day from October, about 70,000 b/d above its targeted cut. That made up for several other countries that fell far from their compliance targets.

These cutbacks are likely to take enough oil off the market that suppliers end up selling oil that has been socked away in storage at record-high levels, analysts said. U.S. stockpiles have been rising in recent weeks, but that is likely from heavy production in the weeks before the cutbacks took place, said Scott Shelton, broker at ICAP PLC. OPEC's cuts will eventually cause U.S. storage levels to decline, probably by the end of March, he added.

"It looks like a desert when you go out to March. There's not much for sale," he said.

But some analysts did point to rising output from OPEC members that were exempted from the deal as a risk going forward. In Africa, production from Nigeria and Libya grew a combined 200,000 b/d in January, with an additional 500,000 b/d capacity that could be brought online over the next six months, according to BMI Research. Russia, the largest non-OPEC producer in the deal, cut production by just 100,000 b/d, one-third of its commitment, the IEA said.

"The OPEC cuts are largely being implemented," said Georgi Slavov, the global head of energy research at Marex Spectron. "More importantly Russia is complying but I am starting to see signs that it may push more oil onto the market."

The agency also warned of continued high stock levels and uncertainty about future output. Following OPEC's supply action, oil prices have risen and are hovering around the mid $50s a barrel. Investors are concerned that elevated prices may lure new production onto the market.

In the most recent week, U.S. production rose again to 8.98 million b/d, the highest level since April. The uptrend in U.S. crude output is in tandem with the increasing drilling activity there.

The number of rigs drilling for oil in the U.S. rose by 8 in the past week to 591, according to oil-field services company Baker Hughes Inc. That is the largest working fleet since October 2015 and 87% larger than it was at its low point in May. Changes in the U.S. oil-rig count are often viewed as a predictor of future output, though its influence is often changing and can take months to show up if it does at all.

Gasoline futures gained 1.2% to $1.5896 a gallon. Diesel futures gained 1.5% to $1.6659 a gallon, its fourth loss in six sessions.