Oil prices rise on expectations of output cut extension

OPEC and other producers are due to discuss an extension during an OPEC meeting on Thursday.

Having Russia in the equation and considering other OPEC and non-OPEC nations’ positive signals for backing the extension, there is a great chance that Iran won’t be needed to cut its production levels.

So a nine-month extension could result in removal of around 1.8 million bpd from the market, making enough room to counter the expected 1 million bpd of additional oil from non-OPEC countries.

In general, the oil supply remains high, which has and will offset OPEC’s output cut effort to an extent. On Wednesday, oil prices were boosted by the EIA reporting a fresh draw in crude oil inventories for the week to May 12, at 1.8 million barrels.

Extending the cuts further to 2018 is now very likely which will definitely help the prices go up in the near future. A Bloomberg poll of oil analysts suggests that 24 of the 25 analysts expect the cuts to continue.

Earlier, Saudi Arabia and Russian Federation made a joint statement, saying during the OPEC meeting to be held May 24-25, they will propose the extension of the output cut deal by nine months. Its actions do not fetch the kind of responses they used to earlier. However, amongst all the bullish clamours that are sweeping the market this morning we not a divergence between the Brent and WTI contracts.

Oil futures moved sharply higher on Friday, as investors showed some optimism about what will come out of next week’s meeting of the Organization of the Petroleum Exporting Countries.

Libya’s share of total OPEC oil export revenues has fluctuated since 2010 as the country’s oil sector was disrupted during the civil war that overthrew the Gadhafi regime and, more recently, as warring factions in the country have repeatedly targeted oil sector installations.

In the long run, though, “whatever it takes” might exact too big a price to pay for the OPEC and non-OPEC producers: Requiring them to leave the 1.8 million bpd in the ground for the foreseeable future.

“Production may increase by more than the 500,000 barrels a day which was the April consensus estimate”.

U.S. crude oil was up 14 cents at US$49.49 a barrel, after finishing the previous session at US$49.35 a barrel, the highest close since April 26.

Global stockpiles hit a new all-time high at the end of the first quarter, largely due to a marked step-up in United States imports and increased maintenance outage at northern hemisphere refineries. This is because the U.S. shale producers have managed to bring down their break-even prices significantly over the last two years with the use of advanced technology and cost reduction initiatives. Breakeven level in the sector is now in the range of $43-45 a barrel.

And finally, OPEC made a statement that floating oil storage globally declined by a third in the first quarter of the year. This is reflected in a near-record level of production.

But more cargoes are flowing right back into its tanks, which can hold 45 million barrels, as sellers struggle to find refiners to buy freshly loaded oil, the traders said.

But too much shale output will threaten to drive down oil prices back down again, and at a certain point more drilling means higher production costs as more operators hire rigs.

If the cuts are not adhered to or the quantum reduced, prices can see a sharp drop.