Oil price decline after OPEC output cut extension an 'overreaction'

Ann-Louise Hittle, vice president at energy consultancy Wood Mackenzie said that the "decision in Vienna sends a signal of continued support for oil prices from OPEC which helps USA onshore drillers make plans" to further increase their production.

Brent crude dropped by $2.60, to $51.36 a barrel, while West Texas Intermediate dropped by $2.58, to $48.78 a barrel.

Baku, Fineko/abc.az. Fitch Ratings says that OPEC's decision to extend production cuts by nine months 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.

Despite oil's negative reaction to the OPEC production cut extension, prices should grind higher into the $60s by the fourth quarter, RBC's Helima Croft told CNBC on Thursday.

With US 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.

Petrol prices are at their lowest since last autumn, with experts predicting that oil cartel Opec's campaign to drive up the price of oil could fail. But this seems to fail miserably to have a change in demand for the product leading to decrease in oil prices.

The US, which is the world's largest oil consumer, has also stayed out and instead become a strong competitor for the OPEC.

Rather than restrain output, US producers are expected to increase output by more than 1 million barrels of oil per day next year. In August 2014, the average daily output was 10.84 million barrels.Crude oil plunged 5 per cent following the announcement, and held its losses early on Friday.

In addition to that, there were rumors that there could be other N-OPEC countries who might join the initiative or there could be deeper cuts; both of which didn't take place. Producers in the U.S. raised output by more than 10 percent since mid-2016 to over 9.3 million bpd to take advantage of higher prices and the supply gap left by OPEC and its allies. Some countries expected the extension to be limited to next 6 months but some of the OPEC partners projected to be nine months but some countries like Russian Federation are projecting it to gone beyond 9 months and expected to be continued until 12 months.

Competition from the United States shale has toughened and is threatening OPEC's monopoly.

The 1.8 million barrel-per-day cut first inked in November 2016 will now last until November 2018.

  • Zachary Reyes