The International Energy Agency (IEA) agrees with my assessment that the historic OPEC/non-OPEC agreement will put us into a supply deficit early next year and will start to work off the global oil glut. We have been seeing signs that demand is rising in the U.S., Russia and China at a time when non-OPEC production is faltering. We are on the road to rising demand and lower global production and so, ultimately higher oil prices. Prices that yesterday, closed at the highest level since July, 2015.

The IEA, in the final year end report, said that, “In December, we are seeing the first proposed output cut by OPEC since 2008 – and the first deal including non-OPEC producers since 2001 – which marks a major departure from the market share policy followed for the past two years. OPEC’s cut to crude production of 1.2 mb/d almost matches its deliberate production increase of 1.3 mb/d in the twelve months to October (the month on which the OPEC cuts are based), while the non-OPEC group has seen its crude output fall in the same period by about 0.9 mb/d. The IEA also raised their demand forecast, following revisions to Chinese and Russian and US data to a 2016 global net demand growth number to 1.4 mb/d and that for 2017 to 1.3 mb/d.

Even before the agreement the IEA said that, “demand and supply numbers suggested that the market would re-balance by the end of 2017. But OPEC, Russia and other producers are looking to speed up the process. If OPEC promptly and fully sticks to its production target, assessed at 32.7 mb/d, and non-OPEC producers deliver the agreed cuts of 558 kb/d outlined on 10 December, then the market is likely to move into deficit in the first half of 2017 by an estimated 0.6 mb/d. This is not a forecast by the IEA, it is an assumption based on the numbers in OPEC’s 30 November agreement, subsequently reinforced by the non-OPEC producers.”

Overnight Reuters reported that China's November crude output fell 9 percent versus a year earlier to 3.915 million barrels per day, data showed on Tuesday, but recovered from October's 3.78 million bpd, which was the lowest in more than seven years. That came as China's refinery output hit a daily record in November of 11.14 million bpd, up 3.4 percent year-on-yea. This is a strong sign that China’s demand is humming and production falling, increasing Chinese oil import expectations.

So, in other words, if OPEC and non-OPEC live up to the agreement they will have achieved their goal of tightening supply and raising prices. It will take months for shale producers to ramp up and fill that void so it is likely that we will see higher prices and maybe a move back towards $60.00 by the end of this year and a test of $80.00 in the coming year.

It is likely that we will see record compliance to the deal. In the past OPEC has only complied by 60%, as per a report by Goldman Sachs, but at the same time every time OPEC cut production, prices went higher. Already Saudi Arabia and Russia have told their customers that they will cut shipments and now Reuters is reporting that the Abu Dhabi National Oil Company is following suit saying it would reduce Murban grade and Upper Zakum crude supplies by 5 percent and Das crude exports by 3 percent.

Of course in the short-term oil does have other short term hurdles. Not only will we have to look at supply reports from the American Petroleum Institute and the Energy Information Administration, we also have the Federal Reserve that is widely expected to raise rates for the first time this year. The rising dollar has held oil back and we will watch closely to see if U.S. inventories continue to fall. The Bloomberg Survey is looking at crude down 1.5 million barrels and gasoline up 2.0 million barrels and distillates up 1.0 million barrels. 

OPEC and low gas prices do not mix. AAA reported that the national average gas price has increased for 14 days in a row following the OPEC oil production agreement on November 30. Today’s average of $2.21 per gallon is up three cents per gallon on the week and two cents per gallon on the month. The national average is up 20 cents compared to the same date last year per AAA.

Natural gas made a big-time pullback after a warmer weather outlook but is this just a shakeout before the real move begins? Even though the polar vortex may moderate, we expect that many in the trade may be shocked by usage during the first real blast of winter. While forecasting weather is a tough job, we know that even normal temperatures will drawdown inventory at a very rapid rate. January call options might be like buying a lottery ticket that could pay off big if we get some big draws. But the risk is high because we only have until December 27th. Use caution but it looks very interesting.