Oil Prices Today Hit New Highs After OPEC Agreement

Oil prices today (Monday, Dec. 5) continue to rise after the official OPEC agreement last week. WTI crude oil prices are up 15% since the agreement was announced.

Brent crude oil prices are currently up 1% on the day, trading at $55.01 a barrel, a new high for 2016. WTI crude oil prices today are up 0.5% to $51.93 a barrel and are nearing 2016's high of $53.58, a mark set in early June.

Here's a look at why oil prices are continuing to rise today, and whether the OPEC agreement can keep prices up over the long haul...

Why Oil Prices Today Continue to Rise

oil prices todayInvestors are still optimistic after the OPEC agreement was announced last week.

The oil cartel's agreement to cut oil production was its first since 2008 and signaled it was still a viable player in the oil market. By cutting oil production, oil supply will better match demand and force prices to rise.

The chart to the right shows how the price of crude oil surged after the OPEC meeting on Nov. 30. Though prices have continued to climb since then, the chart shows how the OPEC agreement has already created a price floor for oil.

And as Money Morning Global Energy Strategist Dr. Kent Moors has explained, establishing a price floor above $50 a barrel was one of the primary goals of the agreement.

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As long as the agreement remains in place, the cartel should be able to keep crude oil prices above this threshold. But, as Moors says, "the OPEC deal means little if it cannot be sustained long enough to allow the market to rebalance."

And despite rising crude oil prices today, this agreement has a long way to go before it can be called a success...

Will the OPEC Agreement Work?

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While investors are optimistic, we've identified three major obstacles to the OPEC agreement succeeding over the long term.

First, Russia's participation in a production cut is crucial. As The Wall Street Journal reports, the cartel is counting on nonmember countries to contribute by cutting 600,000 barrels a day. And this is impossible without Russia, the world's second-largest oil producer.

Moors says "for the deal to have any chance of working," at least half of the 600,000 barrels "must come from Russia."

While Russia was initially on board with a production cut agreement when it was first announced in September, Russia has since wavered on its commitment.

Not only has Russia said it would only be willing to cap its oil production at current levels if OPEC came to an agreement, Russia didn't even attend the Vienna meeting in November. Instead, representatives from Venezuela and Algeria visited Moscow to try to convince Russia to go along with a production cut.

Since the cartel reached a deal, Russia has signaled it will contribute by curbing its oil production. But this is the first joint production cut by OPEC and Russia since 2001. Since Russia's commitment has already appeared flimsy and since there is little recent history of cooperation on cutting production, Russia's willingness to stick with the agreement is far from certain.

Second, cartel members will also have to live up to their promises. Between the Sept. 28 OPEC meeting and the last OPEC meeting on Nov. 30, the contentious negotiations between member states led investors to wonder if a deal could be reached at all.

Now that the details of the deal are out, we can see how much oil production each country will be responsible for cutting. Iran and Iraq, rival countries that both sought exemptions from a deal, are asked to cap production at current levels. Moors says Iran likely can't produce more oil if it wants to, due to infrastructure problems. But he says "Iraq is still a wild card."

And if Iraq decides it needs to produce more oil, there's little the cartel can do to stop it.

Third, the election of Donald Trump as U.S. president signals a change in American energy policy, which could mean more oil production in the United States.

President-elect Trump has proposed making the U.S. "energy independent," largely by cutting restrictions on drilling. The United States is currently the world's largest oil-producing country, and if Trump's policies lead to a significant increase in American oil production, the OPEC agreement might not make a difference.

This doesn't mean the deal will fail. Both Saudi Arabia and Russia need higher oil prices and are likely to work hard to keep the deal on track. But we want our readers to be aware of the hurdles standing in the way of the deal's success.

Since the Middle East is mired in unpredictable chaos right now, energy investors are wise to be cautious. For investors concerned about the stability of the region, our oil and energy expert has a comprehensive guide on how to invest in energy with the Middle East on the brink.

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