Oil price falls despite deal to extend output cut

Oil prices weakened on Friday, prompting a move away from riskier assets and depressing Asian stocks, after an OPEC agreement to extend cuts in crude production for a further nine months disappointed investors who had bet on bigger output cuts.

Kwan said it is unlikely that oil prices will pull back to $40 a barrel, with OPEC members and other countries like Russian Federation bound to intervene to deepen production cuts or extend them to shore up prices.

It was the biggest percentage decline for both benchmarks since March 8th. U.S. West Texas Intermediate slid 0.7 percent to $48.54 a barrel on the New York Mercantile Exchange.

"There was hope that there would be half a million extra barrels coming off", said Robert Yawger, director of energy futures at Mizuho Americas.

Oil edged higher but remained on the back foot after tumbling 5 percent in the previous session.

In light of those gains, investors were "hoping for a little bit more" than what was announced Thursday (http://www.marketwatch.com/story/opec-says-it-will-extend-production-cuts-through-march-2018-2017-05-25), said OM Financial's Stuart Ive. Futures markets activity shows a reduced expectation for the market to balance.

Khalid al-Falih, the Saudi energy minister, told reporters that he expected this to "do the trick" of reducing inventories to their five-year average by the first quarter of next year.

Going forward, Nizam Hamid, European ETF strategist at WisdomTree said: "With supply side dynamics undergoing a fundamental shift [thanks to the impact of USA shale], only decisive action from Opec will boost prices from current levels, and so far investors have not been satisfied that Opec is tackling the issue aggressively enough". That has had a growing effect on global supplies.

Not only did Opec underwhelm the market, many commentators believe curtailment of the cartel's output will be matched by further increases in U.S. shale production, with the headline output stateside tipped to rise to 10m bpd.

The next meeting of OPEC and non-OPEC oil producers is schedule 30 November. "It becomes so efficient that it can make money at sub $50 oil", said Curt Taylor, president of consulting firm Opportune LLP's Ralph E. Davis Associates in Houston.

In December 2016, OPEC and non-OPEC producers reached their first deal since 2001 to curtail oil output jointly and ease a global glut after more than two years of low prices. Spot gold rose 0.2% to US$1,258.29 an ounce, poised for a 0.3% gain for the week.

With U.S. output rising steadily and OPEC and its allies potentially ramping up production in 2018 to regain lost market share, many traders, including Goldman Sachs, already expect another price slump.

"If U.S. shale producers exceeded our projected increases, it'll drive the price down again", Arrington said.

  • Zachary Reyes