Oil falls as OPEC prepares to extend output cuts

Africa's third biggest oil producer said in January that it was seeking to become the sixth country from the continent to join OPEC after its Mines and Hydrocarbons minister met with officials in Vienna to submit his country's bid.

Opec members Libya and Nigeria would remain exempt from the output curbs as they restore lost production, according to Al-Falih.

OPEC decided on Thursday to extend cuts in oil output by nine months to March 2018, OPEC delegates said, as the producer group battles a global glut of crude after seeing prices halve and revenues drop sharply in the past three years.

Had OPEC decided not to renew the production cuts, analysts had predicted that production from Saudi Arabia and Russian Federation would likely increase, putting negative pressure on prices.

"Although Opec hasn't achieved its stated aim of a global glut of oil inventories back to normal levels - thanks mainly to a resurgent U.S. shale oil industry which has taken up much of the slack in the reduced Opec output - revenues have improved", said Darragh Crowley, energy trader with Bord Gáis Energy.

Either way, US production appears to check OPEC at every turn. West Texas Intermediate crude oil, the U.S. benchmark of prices, rallied about 17% from its year-to-date trough at the beginning of May through Wednesday.

David Arrington, president of shale oil producer Arrington Oil Gas in Midland, Texas, said that how USproducers respond in coming months will have as much of an effect on pricing as OPEC's cuts.

The deal is aimed at bolstering petroleum prices, which have remained relatively flat as US shale oil producers turned on the spigot to make up for reduced OPEC output. Too rapid a growth risks "potentially oversupplying the market and revisiting 2014" - a reference to the year when crude prices hit levels south of $40 a barrel.

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But the higher oil prices wouldn't last. The day's volumes of 1.1 million contracts of WTI were the highest since the November 30 session, when OPEC first announced cuts.

Minister of Mines and Hydrocarbons Gabriel Mbaga Obiang Lima said on Thursday: "Equatorial Guinea's joining of Opec is a triumph".

However, in the days prior to the meeting, talk of a possible extension for 12 months, or deeper cuts than the current agreement, helped buoy prices on optimism of a faster drawdown in supply. Oil gained almost 30 per cent in months following the agreement in November and has since stayed around the psychological safe haven of $50, partly due to buoyancy given by expectations of renewed cuts. This means that although much of OPEC claims it is cutting production, its member countries are exceeding their quotas.

  • Zachary Reyes