Oil output cuts extended till 2018

Saudi Arabia and Russia have agreed to extend oil output cuts until March 2018.
This would help stem global crude glut and continue a rise in oil prices.

This announcement followed an earlier meeting ahead of the Organisation of the Petroleum Exporting Countries (OPEC) next official meeting on May 25.

The statement’s strong wording surprised markets and the move is expected to go a long way to ensure that other OPEC members and producers who participated in the initial round of cuts fall into line.

Saudi Energy Minister Khalid al-Falih and his Russian counterpart Alexander Novak said they had agreed to prolong an existing deal until March 2018.

The ministers pledged “to do whatever it takes” to reduce global inventories to their five-year average and expressed optimism they will secure support from producers beyond those in the current deal.There has been a marked reduction to the inventories, but we’re not where we want to be in reaching the five-year average. We’ve come to conclusion that the agreement needs to be extended,” Falih noted.

Saudi Arabia, the defacto leader of OPEC, and Russia, the world’s biggest producer, together control a fifth of global supplies, but have been spurred into action as crude futures LCOc1CLc1 have languished around 50 dollars per barrel.

Under the current agreement that started on January 1, the OPEC and other producers including Russia pledged to cut output by almost 1.8 million barrels per day (bpd) during the first half of the year.

While it was broadly expected that OPEC and Russia would agree to extend the cut, the timing and wording of the statement sent crude prices up more than 1.5 per cent in Asian trading.

I think OPEC and Russia recognise that in order to get the market back on their side they will need ‘shock and awe’ tactics where they need to go above and beyond a simple extension of the deal; The market will also be looking at export cuts and not just production cuts, which is what is required to re-balance the market,’’ Virendra Chauhan, Singapore-based analyst at Energy Aspects said.

Russia’s top producer Rosneft helped prepare the deal and is ready to comply with the extension, according to Russian media.

If producers maintain their cuts at the current pace, it could push the market into a small deficit by the fourth quarter,’’ Edward Bell, Director for Commodity Research at Emirates NBD in Dubai said.

Shale response
Experts await the response of low-cost U.S. shale producers, which could undermine the unified effort to prop up the market.

The U.S. did not participate in the original agreement to cut supplies and producers there have ramped up output this year, buoyed by the recovery in prices from multi-year lows hit in January 2016.

U.S. drilling activity RIG-OL-USA-BHI last week rose to its highest in two years, while U.S. production has jumped more than 10 percent since its mid-2016 trough.

A jump in U.S. exports to Asia, the world’s biggest and fastest growing market and the last region in which OPEC supplies dominate, is a particular worry for the producer club.

Russia and Saudi Arabia may be trying to coordinate a push to keep access to their most important market (China) in their favor and encourage Chinese importers to displace alternative cargoes,” Bell said.

An OPEC source familiar with the market situation told Reuters earlier on Monday that oil inventories in floating storage have declined by one-third since the start of the year.

 

Mazino.D