OPEC drives crude up

Photo: Contributed

Oil prices rose three per cent Thursday to top just above US$51 a barrel as investors continued to cheer on a brighter outlook for crude after OPEC members agreed to cut production.

January crude contracts rose $1.62 to US$51.06 a barrel, the highest it's been since mid-October. The increase follows a one-day gain of US$4.21, or nine per cent, when OPEC announced the deal.

Cavan Yie of Manulife Asset Management says the increase in oil prices suggests markets believe the agreement is not only credible, but more importantly, doable.

"(OPEC members) have an interest in maintaining and getting to a higher oil price. A lot of these countries are highly dependent on revenues derived from oil exports," said Yie, an equity analyst focused the North American energy, financial services and consumer sectors.

"A lot of these nations are — let's face it — distressed... there might be some cheating but the cuts are so diversified across so many nations that it probably won't. be very meaningful."

The move in the price of oil came as the S&P/TSX composite index lost 55.32 points at 15,027.53, weighed down by materials, consumer staples and metals stocks.

On Wednesday, the 14-member Organization of the Petroleum Exporting Countries finalized a deal that would see it lower its output by 1.2 million barrels a day for six months. The group will begin scaling back beginning Jan. 1 to 32.5 million barrels a day.

The agreement also involves non-OPEC countries, who will pare an additional 600,000 barrels a day, with Russia committing to half that amount.

Yie anticipates oil prices to grind higher and settle around the US$50-$65 barrel range over the next 12 months, if the cut goes ahead as planned.

A glut in supply has led to sinking oil prices over the past few years, as countries such as Iran and Saudi Arabia regularly pumped out record amounts.

In mid-2014, a barrel of oil hovered around the US$100 mark, dropping to below US$30 at the start of this year.

Yie said the days of US$100 oil is over, but at least limiting supply can help offset some of the price pain. The deal also shows that the OPEC cartel, which is responsible for a third of the world's crude supply, still holds clout.

"They do wield tremendous power," Yie said. "They're still very relevant, especially after yesterday, when no one thought they were a functional group but now it seems they're able to come to a consensus which is extremely powerful."