Brent hits one-year high as optimism grows over output deal

By Mark Shenk on 10/10/2016

LONDON (Bloomberg) -- Oil rose to a one-year high in London as Saudi Arabia expressed optimism that OPEC will work out a deal with other producers and Russia said it would back an accord.

Brent crude rose as much as 3.5%, erasing a 1.2% drop in early trading. Many other producers have expressed their readiness to work with the Organization of Petroleum Exporting Countries, Saudi Minister of Energy and Industry Khalid Al-Falih said in Istanbul, where he’s attending the World Energy Congress. He will meet in the next couple of days with his Russian counterpart, who said on Monday his country is ready for an accord with OPEC after the group’s members agree on quotas.

"This is a headline-driven situation, and will remain so as long as everyone is in Istanbul," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. "It was the Saudi statement that got us in positive territory and the Russian comments have added to the market’s strength."

Oil has gained about 10% since OPEC provisionally agreed last month to cut production for the first time in eight years. The group’s members will meet this week in Istanbul for talks on implementing the deal and Al-Falih said it’s not unthinkable prices will rise to $60/bbl by the end of this year. In the U.S., output halted its drop to the lowest in more than two years as higher prices bring back drilling activity.

Equities Gain

Brent for December settlement increased $1.08 , or 2.1%, to $53.01/bbl on the London-based ICE Futures Europe exchange. Prices reached $53.73, the highest since Oct. 9, 2015. The global benchmark crude traded at a $1.35 premium to West Texas Intermediate for the same month.

WTI for November delivery rose $1.31, or 2.6%, to $51.12/bbl on the New York Mercantile Exchange. Futures touched $51.60, the highest level since June 9. Total volume traded was 42% above the 100-day average.

Energy shares led the Standard & Poor’s 500 Index higher, as the equity benchmark extended its record for a fourth day. The S&P Oil & Gas Exploration and Production Select Industry index was up 2.2%.

Russian Comments

Russia is ready in principle to consider OPEC proposals, including the possibility of cuts, Energy Minister Alexander Novak said in Istanbul. It still prefers a production freeze and wants to maintain its current output level. Russian President Vladimir Putin said he hoped OPEC would agree on limits to its crude production in November and that his country was ready to support that decision.

"There’s a lot of enthusiasm about the potential for an agreement between OPEC and non-OPEC producers," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "The market is getting ahead of the reality of the situation."

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