OPEC poised to extend production cuts

(AP Photo/Hasan Jamali, File)

OPEC and its allies were poised to extend their production cuts for an additional nine months after last year’s agreement failed to clear a global supply glut or deliver a sustainable price recovery.

Nine months with the same level of production “is a very safe and almost certain option to do the trick,” Saudi Arabian Oil Minister Khalid Al-Falih said at the opening session at the meeting in Vienna. “It’s likely we’ll be balanced earlier than later.”

Six months after forming an unprecedented coalition of 24 nations and delivering output reductions that exceeded all expectations, some of the world’s largest oil producers faced the fact that they’d fallen well short of their goal. Oil prices fell after ministers arrived at the meeting venue.

Al-Falih said the curbs were working, with stockpile draw downs to accelerate in the third quarter. While he expects a “healthy return” for U.S. shale, that won’t derail OPEC’s and proposals for deeper cuts were deemed unnecessary. 

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Some investors are disappointed after speculating OPEC might announce some additional action, said Giovanni Staunovo, an analyst at UBS Group AG.

Brent crude dropped as much as 2.2 percent in London and was little changed at $53.97 a barrel at 10:01 a.m.

So far, OPEC has stopped short of committing to further action beyond March 2018, but officials dropped hints that it’s possible.

“We have said we will do whatever it takes,” said Al-Falih.

The nine-month extension to be discussed Thursday could include an option for an extra three months, according to ministers from Russia and Nigeria. That’s similar to last year’s accord which included the option for an extra six months.

Extending the deal will bring producers prices stability, Nigerian Oil Minister Emmanuel Kachikwu said in a television interview.

“If we keep to the rules, if we keep to the discipline — all the numbers show good compliance — then we should look at a $50 floor,” he said on Thursday. “On a positive note, on an optimistic note, lots of us hope we can crawl back to $60.’’

The Organization of Petroleum Exporting Countries and 11 non-members agreed last year to cut output by as much as 1.8 million barrels a day. The historic pact affected everything from the valuations of U.S. shale producers to the foreign exchange rates of energy-dependent nations such as Brazil and Nigeria.

The supply reductions were intended to last six months from January, but initial confidence in the deal, which boosted prices as much as 20 percent, waned as inventories remained stubbornly high and U.S. output surged. With crude futures dipping back below $50 a barrel last month, Russia and Saudi Arabia took the unusual step of publicly backing longer cuts weeks prior to the scheduled ministerial meeting in Vienna.

That move did the trick, with U.S. benchmark West Texas Intermediate rising 18 percent to around $52 a barrel since reaching a five-month low on May 4. It could also mean there’s little left to gain if ministers ratify the extension at their meeting on Thursday.

You can follow our TOPLive blog on the OPEC meeting in Vienna on Thursday here.

The sluggish decline in fuel stockpiles isn’t their only concern. U.S. crude production rose to 9.32 million barrels a day last week, an increase of 550,000 this year to the highest since August 2015, according to data from the Energy Information Administration. That wipes out almost a third of the supply reduction from OPEC and its allies and the output surge could double by year-end, consultant IHS Markit Ltd. told the group at a meeting last week.

OPEC isn’t worried about shale, which may be close to maximum production, but will keep a close eye on developments in the U.S., Algerian Energy Minister Noureddine Boutarfa said in an interview.

“We will assess how shale oil will react,” Boutarfa said. “We know that the American way is to extract the biggest profit in the shortest time possible.”

 
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