OPEC meets to extend oil cuts for up to one year

Oil climbed back above US$50 a barrel late last week as Saudi Arabia and Russian Federation rallied support for the extension ahead of the official meeting of the Organization of Petroleum Exporting Countries in Vienna.

"Assuming an extension is achieved, an extended stay in the mid-fifties [dollars] per barrel would likely be fine for the flusher GCC producers and key non-cartel producers like Russian Federation - allowing them to execute on core priorities; however, for others it will more just keep them on much needed life support", she added.

One delegate said a longer extension by 12 months was still an option.

OPEC and other oil producers appear set to extend production cuts in an effort to shore up prices.

Given that most analysts expected a 6-month rollover in the weeks leading up to the meeting, a 9-month extension announced after tomorrow's formal ministerial meeting would have been enough to provide a market surprise.

USA crude inventory data released Wednesday by the Energy Information Administration was broadly upbeat for producers, showing the lowest overhang since December 2014. It's a weak position; even if President Donald Trump, a major fan of the USA oil industry, bowed slightly as he accepted Saudi Arabia's highest civilian award last week, the Saudis are essentially acquiescing to a US conquest of their traditional markets and to the loss of their role as the only power capable of balancing the oil market.

"Nine months was priced", she said.

Last year, OPEC officials nearly doubled the price of oil by merely talking about the possibility of capping oil production, even though they boosted output by 1.4 million barrels a day.

For instance, the price of Brent that is usually used to benchmark other prices rose from $53.50 to $54.19 per barrel yesterday.

On Wednesday a joint committee of producers "decided to recommend that the production adjustments of the participating countries be extended for nine months", OPEC said. "Nine months with the same level of production that our member countries have been producing at is a very safe and nearly certain option to do the trick".

Valentin Bissat at Mirabaud Asset Management told AFP that this shows that OPEC "has lost some its ability to fix (oil) prices". Reports that Norway, Turkmenistan and Egypt will join the deal can affect markets only psychologically, since Turkmenistan, for example, produces only about 10 million tons of oil per year, which is a very small amount for the world market.

But in the longer term, there are concerns among OPEC countries that higher oil prices may end up being counterproductive as they encourage US shale gas producers to re-enter the market - a development that could weigh on oil prices.

The production cut, introduced in January, was initially only to cover the first half of 2017, but an ongoing glut has put pressure on OPEC and its allies to extend the cut at a meeting in Vienna on Thursday.

USA output since a year ago has increased by almost a million barrels a day to a daily 9 million barrels. "From the time a barrel of oil is produced in Saudi Arabia for export that's coming to the United States, it's a 60 to 90-day period".

The price of oil, however, slumped $1.03 a barrel to $50.33 in NY trading Thursday on the realization that the extension is unlikely to substantially boost prices in the longer term. And U.S. producers are poised to expand more, even if prices tick upward only moderately as a result of an oil-cut extension by OPEC and its partners.

  • Leroy Wright