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Why Oil Prices Just Jumped

Tsvetana Paraskova

Following a 5-percent plunge on Friday, oil prices recovered early on Monday, rising by more than 2 percent as reports emerged that OPEC and its allies may discuss and even agree to deepen their production cuts to rebalance the market and support prices.

At 10:46 a.m. EST on Monday, WTI Crude was up 1.54 percent at US$56.02, and Brent Crude was trading up 1.26 percent at US$61.25, after prices had plunged on Friday on rumors that the cartel and its Russia-led partners in the OPEC+ coalition were unwilling to deepen the current cuts.

But as the week of the Vienna meeting on December 5-6 started, OPEC sources told Reuters that amid expectations of a glut in the first half of 2020, there are ongoing talks about deepening the current 1.2-million-bpd production cut.

Apart from talk of deeper cuts, oil prices were also supported on Monday by the results of a private survey which showed that China’s manufacturing activity expansion beat expectations in November.

In addition, Thamer Ghadhban, the oil minister of OPEC’s second-largest producer, Iraq, said on Sunday that the OPEC+ coalition would discuss cutting another 400,000 bpd to deepen the production restrictions to a total of 1.6 million bpd.

Related: Saudis No Longer Willing To Compensate For OPEC+ Cheaters

Ironically, Iraq is the biggest laggard in complying with the current cuts, having repeatedly exceeded its quota in the deal. On the other hand, OPEC’s largest producer and de facto leader Saudi Arabia is said to be ready to tell fellow producers in the OPEC+ pact that the Kingdom would no longer tolerate and compensate for cheating on assigned production quotas.

There are basically three scenarios for this week’s meeting, according to Warren Patterson, ING’s Head of Commodities Strategy and Senior Commodities Strategist Wenyu Yao. These are: 1) OPEC+ decides to take no action at this time, potentially leaving a decision for March next year. 2) roll over the cuts as is, and 3) extend the deal AND deepen the cuts.

“We believe that only the final scenario would be constructive for oil prices, as it is the only scenario which would deal with the surplus over 1Q20,” ING’s strategists said.

By Tsvetana Paraskova for Oilprice.com

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