OPEC extends output cut, but big oil price increase unlikely
- Author: Zachary Reyes May 27, 2017,
May 27, 2017, 5:24
Earlier in May, for example, both Saudi Arabia and Russian Federation, who is not a member of OPEC but is seen as a critical part of any potential agreement, said they backed extending the production cuts until March 2018.
Saudi Oil Minister Khalid A. Al-Falih, who presided over the meeting, said that that the extension should help lower high crude inventories to a level in line with "the five-year average by the end of the year".
The Organization of Petroleum Exporting Countries (OPEC) decided on Thursday at a meeting in Vienna to extend cuts in oil output by nine months to March 2018, an OPEC delegate said. With prices above $50 from lows of previous year, they are increasingly moving back into the market.
The nation's long-term reliance on oil has caused economic pain in recent years as internal problems meant the country was unable to match its historic production levels.
Brent crude oil LCOc1 settled down $2.50, or 4.6 percent at $51.46 a barrel.
Besides profit-taking, traders also realize that the deal does not immediately solve the oil market's oversupply problem.
Amid concerns that rising U.S. shale oil output will nullify the producers' efforts, Falih said they were prepared "to do whatever is necessary" to stabilise the market, including by further extensions.
"Despite the production limit, the International Energy Agency has calculated that the cartel earned nearly $75million extra per day in the first quarter of this year compared with the last quarter of 2016". OPEC members typically do not comply with quota agreements, and United States shale producers are likely to continue flooding the market, according to Tortoise Capital Advisors.
The Organization of Petroleum Exporting Countries has made a decision to extend cuts in oil output by nine months until March 2018.
How shale producers respond in coming months will have as much of an effect on pricing as OPEC's cuts, he said.
Early on May 25, Brent was trading 1.4% lower at $53.21 a barrel with the West Texas Intermediate (WTI) benchmark edging down by almost the same amount to $50.57 per barrel. Iran's Bijan Namdar Zanganeh floated possible extensions of three months, six months or even a year and said his country had "no difficulty" with any of the options, while Jabbar Ali Hussein Al-Luiebi, his Iraqi counterpart, mentioned "the scenario of a nine-month freeze".
US oil production C-OUT-T-EIA has risen more than 10 percent since mid-2016 to more than 9.3 million bpd.
More than 400 oil rigs are now working US shale fields - an increase of more than 120 percent compared with a year ago.
The oil-producing countries discussed a possible mechanism to smoothly transition out of the production cuts agreement, according to Novak, who added it was too early for agreement to be reached on the issue.