OPEC Favors Production Cut Extensions As Next Meeting Nears

Cornelia Mascio
Marzo 21, 2017

Russia, the largest of the 11 outside producers working with OPEC, has not publicly said whether it supports extending the supply cut, but is wary about the revival of US shale output due to higher oil prices.

Money managers cut bets on rising West Texas Intermediate crude by a record amount during the week ended March 14, while wagers on a further price drop doubled as oil remained below $50 a barrel.

WTI crude has "found itself vulnerable to heavy losses.as the rising drilling activity in the US reinforced the oversupply fears", said Lukman Otunuga, research analyst at FXTM, in a note. Saudi Arabia's energy minister, Khalid Al-Falih, has said Opec will extend the deal if stockpiles are still above their five-year average.

Energy companies working in shale oil basins in the United States have adapted to lower price points so that, once the market does recover, they're more efficient at returning to work.

U.S. drillers added 14 oil rigs in the week to March 17, bringing the total count up to 631, the most since September 2015, energy services firm Baker Hughes said on Friday.

"The solid weekly gain in US oil rigs continues and the market sees that", said Bjarne Schieldrop, chief commodities analyst at SEB AB in Oslo.

After seeing a few days of plummeting oil prices, we are, once again, on the mend. "A major threat to the market, whether a BAT or simple tariffs are enforced, could arise from diminished oil and product demand as protectionist policies are sure to weigh on economic growth".

Crude oil is weaker on Monday as USA oil production is showing no signs of slowing down.

However, most of the investors that had expected oil prices to book decent gains in response to the output cuts would have had their hopes dashed in the last couple of weeks.

"An extension is needed to balance the market", an OPEC delegate said.

Russian Federation undertook to slash oil production by 300,000 barrels per day in the first half of 2017 versus October 2016 within the framework of the OPEC agreement. So at the moment the effect of the cuts looks much more short-lived than expected, and the fall in prices last week may indicate a kind of turning point. Russian Federation and other non-OPEC producers agreed to cut half as much. At 631 rigs, this is the biggest count since September 2015.

Last week Tuesday, oil fell to its lows of the year, below $48, after the Organization of Petroleum Exporting Countries' monthly report showed that Saudi Arabia's output was above 10 million barrels in February. According to the IEA, Iraq will increase its output to 5.4 million barrels per day by 2022, which is significantly higher than the earlier estimates of an increase to 4.6 million bpd by 2021.

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