OPEC to Consider Deeper Production Cuts at Meeting Next Week

Production cuts were expected to be extended by six months, but the likelihood of a longer agreement has given the market more confidence that the push could significantly reduce global oversupply. There was no comment on Russian Federation and Saudi Arabia's March 31 date.

So, the "Saudis are going to try their best to maintain the cuts at the very least", and there is some chance that the cuts will be increased, said Ganguli.

Saudi Arabia and non-OPEC Russia have said they want an extension to output reductions of nearly 1.8 million barrels per day (bpd) that were initially agreed to run in the first half of 2017. OPEC agreed to slash the output by 1.2 million barrels per day from January 1.

"The production cuts are providing a floor on [oil] prices", said Ganguli.

If the cuts are not adhered to or the quantum reduced, prices can see a sharp drop. USA crude oil CLc1 was 84 cents a barrel lower at $48.23.

A surplus of USA supply has led to large volumes of crude being exported from the United States to northern Asia, undermining the OPEC-led efforts to tighten the market.

Investors hailed the drawdowns as the beginning of the end of a two-year supply glut - raising hopes for steadily rising per-barrel prices.

Global oil supply fell by 41,000 barrels per day (bpd) in April, the Organisation of Petroleum Exporting Countries (OPEC) said in this month's oil market report. "The market will also be looking at export cuts and not just production cuts, which is what is required to re-balance the market". "Adopting the same scenario approach for the second half, the stock draws are likely to be even greater".

Overall, crude imports from Saudi Arabia rose the highest at 42 per cent to 1.38 million b/d from 970,000 b/d.

Still, there are three other unlikely, but possible outcomes for the OPEC meeting, according to Ganguli. Though there is no authentic source of getting oil inventory data, analysts say that crude oil floating inventory is between 800 million to 1 billion barrel.

American shale has been particularly responsive to the higher price range because it is less capital intensive than other ventures.

There would be the "higher risk of a break down in the agreement to noncompliance", said Ganguli.

At the largest US storage facility at Cushing, Oklahoma, storage tanks costs about 35 cents a barrel per month, traders say, compared almost 50 cents a year ago. The increase, OPEC said, represents the biggest increase among countries within the oil producers' group. That should help tighten the oil market and push up prices as demand rises gradually this year, he said.

The ongoing struggle to thin supplies has forced economists to cut their oil price forecasts. But for Saudis the deal will also be for political expedience. "That would pressure prices significantly again, and "that's when the market share [issue] comes into place".

OPEC is scheduled to meet on 25 May to decide the production policy and extension of the deal by nine months.

  • Zachary Reyes