Oil drops after OPEC-led output cut extension falls below expectations

OPEC countries and 11 other oil-producing nations, including Russian Federation, first agreed to reduce production last December in an effort to boost flagging prices.

Oil had climbed back above US$51 a barrel after Saudi Arabia and non-Opec member Russian Federation rallied support from the Organisation of Petroleum Exporting Countries (Opec) and other nations to extend the deal into next year.

Clawing back some of Thursday's losses, global benchmark Brent futures LCOc1 were up 17 cents at $51.63 a barrel at 1103 GMT.

Oil prices rose more than 1 per cent on Friday, a partial rebound from the previous day's steep slide that came when an OPEC-led decision to extend production curbs did not go as far as some investors had hoped. This output freeze exemption would help Nigeria to retain about 78,000 barrels per day (bpd), which is what Africa's top producer and counterpart, Angola, has presently given up to boost global prices.

The discount widened to more than $8 a barrel in February 2016, the most in nearly a year, amid a glut as OPEC pumped at will to defend market share from rivals including US shale producers. Oil price suffered more than 3 percent selloff after the OPEC and participating N-OPEC countries announced the agreement to an extension for nine months until March 2018.

WisdomTree ETF strategist Nizam Hamid said: "The falls may provide a buying opportunity for investors who believe in the long-term story for oil, but they also highlight the environment of heightened volatility which the commodity is facing".

Saudi Energy Minister Khalid Al-Falih said the decision was the optimal choice following deliberations aimed at rebalancing the market and bringing inventory levels down to five-year average levels, i.e. from current levels of around 3bn barrels to 2.7bn barrels.

Oil's earlier price decline, which started in 2014, forced Russian Federation and Saudi Arabia to tighten their belts and led to unrest in some producing countries including Venezuela and Nigeria. Oil markets are going to be grossly oversupplied in 2018 without OPEC action.

"Oil was up $5 in two weeks and part of that was speculation by some that OPEC would cut production even more", said James Williams, energy economist at WTRG Economics. However, the extent of production cut is retained at 1.8 billion barrels per day.

As the de facto leader and largest producer of OPEC, Saudi Arabia has cut its production the most of any member of the bloc.

While an agreement to extend supply cut is a positive fundamental development for the oil market, we suspect that the price may remain subdued despite the deal.

  • Zachary Reyes