Oil benchmarks continued to register gains on Tuesday (16 May), after Russia and Saudi Arabia – two of the world's largest crude producers – claimed they were ready to extend ongoing output cuts well into 2018.
At 2:19pm BST, the Brent front month futures contract was up 0.71% or 37 cents to $52.19 per barrel, while the West Texas Intermediate (WTI) was up 0.80% or 39 cents to $49.24 per barrel, as both contracts extended overnight gains.
Saudi Arabia and Russia said they would extend an agreement to cut output, originally designed to end in June 2017, for a further nine months until March 2018.
Speaking at the end of a meeting in Beijing on Monday, Saudi energy minister Khalid al-Falih and his Russian counterpart Alexander Novak stated both countries would do "whatever it takes" to reduce the current oil glut.
Fawad Razaqzada, technical analyst at Forex.com, said the bullishness in price action taken by traders over the past few days has eroded many of the bearish factors that were in force until the start of last week.
"Brent, for example, was quick to reclaim high ground as soon as speculation about an extension of the deal to the first quarter of 2018 started. It has since broken many resistance levels and today reclaimed the 200-day average. The broken resistance levels may turn into support going forward. But the pace of buying may slow down as price approaches nearer to the top of the recent range."
However, with macro sentiment in favour of each oil barrel removed by Opec being partially fulfilled an American one, the price outlook is far from certain. Relentless Opec soundbites alluding to a possible output cut extension in recent weeks had many analysts predicting a $51-52 barrel price just prior to the cartel's ministers' meeting on 25 May, but that level has already been breached.
The barrage of long trades, i.e. punts on higher prices, seen since Monday also runs contrary to the rapidly decoupling long positions of hedge funds, as US production climbed to 9.3m bpd for the week ended 5 May; the highest on record since April 2015.
According to the US Commodity Futures Trading Commission (CFTC) data, hedge funds and other money managers' net-long positions in the WTI contract fell 17% to 168,814 futures and options in the week ended 9 May; the lowest since November 2016. Much of it was down to the fact that short calls, i.e. bets on a falling oil price rose 37% and have tripled since the end of February.
Closer to home ICE Futures Europe said its net-long positions had also fallen, with bets on Brent, considered the global proxy benchmark, down 13% to 280,678 contracts. With no material change in the market dynamic some fear traders betting Opec's stance might be setting themselves up for a fall.
David Wech, managing director of Vienna-based JBC Energy, warned the market risked getting carried away. "With the prospect of production cuts stretching into 2018 being raised, we reiterate our current base case for 2018 as being strongly oversupplied to the tune of close to 1.5m barrels per day (bpd) in the broader oil complex on average for the year.
"The potential extension of the [Opec, non-Opec cuts] programme to the end of March would not alter this picture drastically, although it might guard against price downside to an extent in the most oversupplied phase of the year. Only if we assume 100% compliance with cuts for the whole of next year can we envisage a market which is more or less balanced."
Gold sees modest gains
Away from the oil market, precious metals also registered modest gains. At 2:43pm BST, the Comex gold futures contract for June delivery was up 0.36% or $4.40 to $1,234.40 an ounce, while spot gold was up 0.31% or $3.83 to $1,234.18 an ounce.
FXTM research analyst Lukman Otunuga said a vulnerable dollar supported gold prices. "Although US interest rate hike expectations are likely to dictate where gold trades to in the medium to longer term, uncertainty, and geological tensions should support the metal in the short term.
"Persistent dollar weakness should encourage short term bulls to send prices above $1,235. A breakout above $1,235 may provide permission for buyers to send prices higher towards $1,245."
Elsewhere, Comex silver futures contract was up 0.70% or 12 cents to $16.72 an ounce, while spot platinum was up 0.82% or $7.65 an ounce to $937.05 an ounce.