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OPEC-led rally for oil is riding on the answers to these four questions

MARKETWATCH 9:52 AM ET 12/1/2016

Behind the recent massive rise in crude oil prices was an OPEC deal that some doubted would ever get done. Now, as questions linger over the historic agreement, analysts wonder just how much higher prices can go.

There were some signs of hesitation earlier Brent crude was dodging over and under the $52 a barrel mark (http:// www.marketwatch.com/story/oil-prices-keep-climbing-after-opec-deal-brent-shoots-above-52-a-barrel-2016-12-01), though it has since pushed past $53, a nearly 3% gain. West Texas Intermediate crude was climbing over $50 a barrel, up 2.8%, on the heels of its dazzling 9.3% gain Wednesday.

Count the Barclays commodities research team among the doubters. They told clients in a note Thursday that the Organization of the Petroleum Exporting Countries deal looks a little "too good to be true."

"We believe the outcome is consistent with our view of what OPEC production levels were expected to be in 2017 irrespective of the deal reached today," said the analysts, led by Michael Cohen. "In other words, the meeting is highly unlikely to substantially affect the oil-market balance."

Chiefly, they doubt output from Iraq and Iran will be lower in the first quarter. And considering that the output agreement will only come into force in January, Saudi Arabia and other producers "could technically produce high levels in December to add to their inventory levels," Cohen said.

Read:The surprise OPEC deal that was 2 years in the making (http://www.marketwatch.com/story/heres-what-happened-at- opecs-oil-meeting-2016-11-30)

FXTM's chief market strategist Hussein Sayed pinned it down. Whether or not oil prices can keep rising really comes down to four questions borne of that OPEC deal, he said:

1.) Which countries, other than non-OPEC Russia, will commit to a cut?

While Russia has said it would come on board with output cuts of up to 300,000 barrels a day in the first half of 2017, it remains to be seen whether other countries will join in when OPEC and non-OPEC producers meet Dec. 9 in Doha, noted Sayed.

2.) Will the process be monitored effectively, or is there risk that a "prisoner's dilemma" encourages some members to exceed their production quota?

In other words, if all parties don't cooperate, the market won't see real change to the supply/demand problem.

3.) Will U.S. drillers return to brisk production if prices hold above $50 and how many rigs will be reactivated?

The most recent production data from the U.S. Energy Information Administration showed U.S. production increased by 9,000 barrels a day to 8.7 million barrels for the week ended Nov. 25.

Read:How an OPEC deal could catapult U.S. producers back to stardom (http://www.marketwatch.com/story/how-an-opec- output-deal-could-catapult-us-producers-back-to-stardom-2016-11-23)

4.) Will Donald Trump's policies add to supply?

The effect of the president-elect's pledges, such as easing federal restriction on oil drilling, which could add an oil glut to the market, may become clearer in the second half of next year. (http://www.marketwatch.com/story/how-an- opec-output-deal-could-catapult-us-producers-back-to-stardom-2016-11-23)

"If oil prices traded in the range of $50-$60, shale isn't likely to return in massive levels, however if prices spiked above $60 then the shales industry will return as a major player to rebalance prices," said Sayed in the note to clients.

"The bottom line is OPEC's deal will put a floor in, but on the upside multiple factors should be taken into consideration," he said.

"OPEC continues to be successful at keeping the market guessing and will continue to do so until it sees evidence that stocks are drawing more actively in the first half of the year," added the Barclays analysts.

Read: These U.S. oil stocks are soaring after OPEC's cut--and more gains are on the way (http://www.marketwatch.com/ story/these-us-oil-stocks-are-soaring-after-opecs-cut-and-more-gains-are-on-the-way-2016-11-30)

-Barbara Kollmeyer; 415-439-6400; [e-mail]


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