Oil prices rose significantly on Friday after OPEC announced it agreed to boost its production by about 1 million barrels per day.  OPEC photo.

US oil prices up over 5 per cent

Oil prices jumped on Friday after OPEC announced the cartel has agreed it will limit its crude production increases to a combined amount of about 1 million barrels per day (b/d).

Participants in the OPEC supply cut agreement met in Vienna this week.  Saudi Arabia and Russia had been pushing for an increase in production to stave off a possible supply shortage and resulting price increases.

Iran had initially said it was not in favour of any increases, however, Tehran began to soften its stance as the week progressed.

According to Iraq, the real increase in production will amount to about 770,000 barrels per day (b/d).  As a number of OPEC countries are facing production declines and are struggling to reach their full quotas and some producers will not be able to compensate for the losses.

Reuters reports that the actual production increases set a bullish tone because the agreed amount came in below some of the highest figures that had been discussed prior to the meeting.

“There was a lot of anticipation in the market that there was going to be a lot of new oil coming to market, and that isn’t going to happen, at least for now,” John Kilduff, a partner at Again Capital told Reuters.

“We were teased with an increase of about 1.8 million barrels (per day) at one point, and we ended up getting about 600,000,” Kilduff said.

By 3:40 p.m., EDT, US West Texas Intermediate rose 5.13 per cent or $3.36/barrel to $68.90 and benchmark Brent was up $2.44 to $75.24/barrel.  The Canadian Crude Index 7.04 per cent or $2.79 to $42.40.

Harry Tchilinguirian, head of oil strategy at French bank BNP Paribas, told the Reuters Global Oil Forum “the effective increase in output can easily be absorbed by the market”.

“You think about 1 million b/d coming back online … it’s not going to happen instantaneously, it’s going to take time,” Brian LeRose, the senior technical analyst at ICAP told Reuters.

The OPEC supply cut began in January 2017 and participants often exceeded their pledged output reductions, draining the global oversupply of crude that pushed oil prices down to below $30/barrel in 2014.

Strong demand as well as restrained OPEC output has led to calls from consumers and heads of state to increase their supply.

Production shortages in Venezuela, Libya and Angola as well as likely export sanctions on Iran have boosted worries about a crude supply shortage.

In the middle of it all is a burgeoning trade dispute involving the United States and its trading partners, including China.  China has threatened to put 25 per cent import tariffs on US crude in retaliation for steep Trump administration tariffs on some goods from China.

Such a move by Beijing would make US crude uncompetitive in China and force its buyers elsewhere.  According to Reuters, Chinese crude buyers have already scaled back orders and a drop in supplies is expected in September.

On Friday, Baker Hughes reported the US oil rig count fell by 1 to 862, the first decline in 12 weeks.  In Canada, the rig count rose by 16 to 103 and now sits at five rigs more than this time last year.