OPEC Deflategate: Can Saudi-Russia 'Bromance' Boost Oil?

Neil Wilson at ETX Capital said Opec members "bottled it", adding: "A nine-month extension just isn't enough to really lift oil prices as we'll continue to see USA shale fill the gap".

In early December, oil producers outside OPEC, led by Russian Federation, agreed to reduce output by 558,000 barrels per day (bpd).

"With Russia and Saudi announcing nine months (of extended cuts) a week before, this was already priced in, so the market wanted the "over-and-above" which didn't come - hence the sell-off", said Virendra Chauhan, oil analyst at Energy Aspects in Singapore, referring to a statement by Saudi Arabia and Russia earlier in May that a nine-month extension to the cut was needed.

A report published late Thursday by Morgan Stanley said the decision will lead to further declines in crude oil inventories through the second and third quarter, a situation that would support higher crude oil prices.

Global benchmark Brent fell by 0.5% to $51.18 a barrel, while the U.S. crude prices decreased by 0.6% to reach $48.57 a barrel, reported Reuters.

USA crude prices tumbled 0.6 percent to $48.57 a barrel on Friday, after losing 4.8 percent overnight, set to end the week 3.5 percent lower.

"We project that annual average crude oil production in the U.S. and Canada will rise by 1.6m bpd between 2016 and 2018, an offsetting factor for the cuts being made by Opec and its non-Opec partners".

The OPEC alliance faces competition from US shale producers. "As OPEC cuts and if USA inventories decline to low levels, oil prices may increase, so China may use their own reserves or shop around rather than purchase oil at a higher price, capping the high end of the price range".

OPEC and non-OPEC oil producers first agreed to cut output in December 2016 - the first joint deal in 15 years - and said the curbs could be extended by a further six months. Much of the responsibility will, therefore, continue to fall on Russian Federation to secure the non-OPEC production cuts. That will be welcome news to consumers and energy-hungry businesses worldwide but could continue to strain the budgets of some of the more economically-troubled oil-producing nations, like Venezuela and Brazil.

But even with the reductions, oil prices have risen less than OPEC hoped for from last year's levels.

With technological advances in the past few years making US shale oil profitable a much lower levels, the united OPEC-Russia front is feeling the squeeze, said Daniel Yergin, a Pulitzer Prize-winning author and leading oil analyst.

The decision extends a cut of 1.2 million barrels a day by OPEC.

Following the meeting, Saudi Arabian Energy Minister Khalid al-Falih lauded OPEC's consensus over the output cut. "Output in the U.S. alone is projected by IHS Markit to rise by more than 900,000 bpd from the beginning of 2017 to the end of the year".

"The outcome of the OPEC meeting which was scheduled on 25th May 2017 chose to cut 1.8 million barrels per day through March 2018".

  • Zachary Reyes