Although the actual meeting for OPEC and NOPEC isn’t scheduled until May 25th, the timing of this announcement from the largest producer and the largest exporter (25% of global production between them), was a complete surprise and probably a testament to two things.
“We are of the camp that the extension cuts might not be enough – they might need to extend the cuts and to increase them to stabilize this market”, said Oliver Sloup, director of managed futures at iitrader.com.
A strong recovery in U.S. crude production – not subject to the cuts implemented by OPEC and other crude-producing nations – is one factor that has contributed to that decline, creating concern that it will make it more hard to rebalance crude markets as supply continues to outstrip demand.
Brent for July settlement added as much as 1.7%, to $51.69 a barrel on the London-based ICE Futures Europe exchange.
Its US counterpart West Texas Intermediate (WTI) followed a similar trajectory and was this morning above $48 a barrel. Taking the big bazooka of the wall, they jointly announced that the OPEC-led production deal would be extended by nine months until March 2018. Hedge funds have undone all their wagers on an Opec-driven oil rally, and that could be good for prices.
The two biggest producers participating in the curbs, OPEC’s Saudi Arabia and non-member Russian Federation, both signaled willingness on May 8 to prolong the deal. They also come amid a market fallback in recent weeks over doubts that the cuts, which total some 1.8 million b/d from October levels, are effective, given stubbornly high stock levels and the resilience of United States shale. This disappointed the bulls and this was the reason for the oil prices falling below $50 and continuing to trade weakly over the past couple of weeks.
Global oil prices settled ended all but unchanged, but still notched up their first weekly gain in a month on expectations that OPEC will agree to extend its production-cut agreement for six months or more, and may even deepen the cuts. For the strategy to work, however, we believe that (1) compliance needs to remain high and (2) long-term oil prices need to remain low to prevent shale producers from ramping up investment significantly more.
European benchmark North Sea Brent crude rose $1.54 to $52.38 a barrel by 1005 GMT (6.05 a.m. ET) and traded intraday at $52.52, the highest since April 24. On Friday, consultancy Baker Hughes reported the number of active drilling wells in the country had hit 703, the 16th straight week of increases.
Opec members agreed in November to cut 1.2 million barrels a day of oil production, and several non-members, including Russian Federation, agreed in December to contribute a combined 600,000 barrels a day of output reductions.
In its monthly report last week, OPEC said that global markets are still suffering from oversupply and it appealed to other producers, including the US, to stop pumping so much.
Opec produced 31.74 million barrels a day in April, according to secondary-source estimates published by the group.