January couldn’t be a more crucial month for crude oil.

The OPEC and non-OPEC production cut deal comes into force on the first day of the new year as producers including Saudi Arabia and Russia look to reduce supply in the currently flooded crude oil market.

With the IEA reporting that oil demand could continue rising up until 2040, the race to curb supply in order to boost the price of the black stuff has never been more imperative. OPEC producers are hoping that the agreement reached to reduce output by 1.2 million barrels could once again see the price per barrel of Brent crude reach a figure of $60 for the first time since July 2015. The co-operation of non-OPEC producers, most notably Russia, only added to the importance of the first reduction of production since the financial crisis of 2008.  Not only would this help improve the budgets of oil-reliant nations such as Saudi Arabia, it would also help the UK Index heavyweight oil producers BP and Shell to buoy the blue-chip index in the first few weeks of the year.

However, many analysts and investors alike remain sceptical that OPEC members will adhere to the agreed output limits as the notoriously uncompliant group begins its first production deal in a week’s time. Goldman Sachs recently reported that production limiting deals in the past have only seen an average 60% adherance to previous targets whilst forecasts for 2017 envisage 84% compliance.

Furthermore, this week’s official US Department of Energy crude oil inventories showed a surprise build of 2.25 million barrels. Given that the forecast was for a drawdown of a similar size, does this mark the re-emergence of now cost-effective US shale producers back on to the world market?

With Brent crude continuing to trade in a tight range around the $55 mark as we move into the new year, how events play out in the first 30 days of the year could have a greater influence than the rest of the year combined. Should OPEC producers once again fail to stick to guidelines and try to cheat the deal, it could provide financial markets with an early shock to begin the new year.

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John Truong, Senior Trader, 23 December