The Organization of the Petroleum Exporting Countries (OPEC) on Thursday agreed to extend until March 2018 an oil output cut agreement put in place for six months effective from 1 January and will expire in June, Iranian media reported.
Disappointment at the oil deal weighed on commodity currencies, while the United Kingdom pound took a knock from polls suggesting that the ruling Conservative party’s poll lead is narrowing as the early June election day approaches. A deeper production cut could have created a wider than needed supply gap in the market that shale producers may have stepped into and higher prices due to this reduced supply would have made them even more profitable.
“The price could conceivably hit $60 barrels by year-end”.
The decision extends a cut of 1.2 million barrels a day by OPEC.
There are arguments whether the cut needs to be for 6 months or nine months or 12 months. Its members produce about 32.4 million barrels a day.
Saudi Energy Minister Khalid Al-Falih said the decision was the optimal choice following deliberations aimed at rebalancing the market and bringing inventory levels down to five-year average levels, i.e. from current levels of around 3bn barrels to 2.7bn barrels.
Which countries have stayed out of the deal?
Dallas Federal Reserve Bank President Robert Kaplan said late on Wednesday that he felt “very strongly” that USA trade relationships with Canada and Mexico help US competitiveness.
That could increase supplies and push down prices.
What could be the repercussions of the deal for OPEC?
“The U.S. shale producer does what everyone thought was impossible. US output has increased c.1m bbl/d to 9m bopd, placing the country’s output alongside Saudi Arabia and Russian Federation, thus somewhat diluting OPEC’s ability to play a role in setting prices and supplies”.
Rats said that’s not how the cuts have played out because US producers, which don’t participate in the agreement, have “responded by reactivating a staggering 246 rigs since November 2016-a more than 50% increase in the oil-directed rig count”.
Is a further extension likely?
In general, the oil supply remains high which has, and will, offset OPEC’s output cut effort to an extent.