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Optimism in OPEC Output Deal Leads to a Rise in Oil Prices

Dec 22, 2016

Oil prices edged up in tepid trading on Thursday, supported by strong U.S. data, a pause in the U.S. dollar rally and optimism that crude producers would abide by an agreement to limit output to prop up prices.

The gains were curbed by an unexpected rise in U.S. crude inventories last week and moves by Libya to boost output over the next few months.

Brent futures for February delivery rose by 34 cents to $54.80 a barrel by 1430 GMT, having finished 89 cents lower on Wednesday. U.S. West Texas Intermediate crude rose 27 cents to $52.76 a barrel.

The dollar index, which tracks the greenback against a basket of six currencies, slipped by 0.1 percent as investors took profits after its rise to a 14-year peak earlier this week.

A weaker dollar makes greenback-denominated commodities including oil cheaper for holders of other currencies.

New orders for U.S.-made capital goods rose more than expected in November amid strong demand for machinery and primary metals, suggesting some of the oil-related drag on manufacturing was starting to fade.

U.S. data also showed the economy grew faster than previously estimated in the third quarter, notching its quickest pace in two years.

Optimism that OPEC and non-OPEC oil producers would stick to a deal to cut output by almost 1.8 million bpd from Jan. 1 also supported prices, which have added to gains since the deal was agreed on Dec 10.

"The announcements coming from Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Iraq, and Russia are all encouraging signs that they will abide by the cut and hopefully other countries will follow suit," OPEC member Kuwait's oil minister Essam Abdul Mohsen Al-Marzouq told reporters.

Ric Spooner, chief market analyst at CMC Markets in Sydney, said he was also upbeat about upcoming cuts: "It is a safe assumption particularly in the early stages that OPEC and non-OPEC producers will abide by the agreement to curb output."

On the downside for oil prices, U.S. crude stocks posted a surprise build last week, climbing by 2.3 million barrels compared with an expected decline of 2.5 million barrels, government data showed on Wednesday.

Libya's National Oil Corporation (NOC) said it hoped to add 270,000 barrels per day (bpd) to national production after it confirmed on Tuesday that pipelines leading from the Sharara and El Feel fields had reopened. NOC said that Sharara output reached 58,000 bpd on Wednesday.

"Short-haul crude oil supplies to Europe are increasing with the restart of Libya and that will provide a cap for European crude oil strength," Olivier Jakob, managing director of PetroMatrix consultancy, said.

Libya recently doubled output to 600,000 bpd, and Jonathan Barratt, chief investment officer at Ayers Alliance, said the country had the capacity to ramp up production further, to as much as 1.2 million bpd.

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