Oil price falls despite OPEC deal extension
- Author: Zachary Reyes May 28, 2017,
May 28, 2017, 23:42
Brent crude oil settled down $2.50, or 4.6 percent at $51.46 a barrel.
The FTSE 100, U.K.'s benchmark for blue-chip stocks, was up 10.15 points or 0.14 percent to 7,527.86. Since then, trading has been volatile. OPEC's move was greeted by a sell-off.
Rather than restrain output, USA producers are expected to increase output by more than 1 million barrels of oil per day next year.
This is the first time since 2001 that OPEC and some of its rivals had reached a deal to jointly reduce output to tackle the global oil glut. The catalyst was a YouGov poll which showed the Conservative party's lead over Labour has been reduced.
"I think it was kind of a knee jerk reaction, I don't think it was anything meaningful", said Antoine Halff, Director of the Global Oil Program at Columbia University.
Regarding OPEC's decision to extend production cuts by nine months, the analysts believe that this should provide some support for oil prices around the average year-to-date levels and help digest a significant part of excessive inventories during the rest of the year. Indeed, any effort by the group to support prices through production cuts runs the risk of being undermined by a surge in USA shale production. "But all indications discovered that a nine-month extension is the optimum", he said. Crude oil prices fell quite sharply in the aftermath of this announcement however, with many investors clearly having hoped for more aggressive cuts.
The alliance between OPEC and non-OPEC producers is strong, but not strong enough to derail production momentum from North America, analysis finds. "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.
US oil production C-OUT-T-EIA has already risen by 10 percent since mid-2016 to over 9.3 million bpd, close to the output of top producers Russian Federation and Saudi Arabia.
"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".
Buy the rumor and sell the news worked well on Thursday, when Opec disappointed the market by announcing same quantum of cut as prices tanked more than 6 per cent from its five-week high of 52 per barrel on Thursday itself.