Published: Sun, June 04, 2017
Economy | By Melissa Porter

Oil prices rise in anticipation of extended OPEC-led production cut

Oil prices fell sharply in North American trading on Thursday, erasing overnight gains following reports that global crude producers agreed to extend production cuts for an additional nine months, while ruling out deeper cuts.

However, in the days prior to the meeting, talk of a possible extension for 12 months, or deeper cuts than the current agreement, helped buoy prices on optimism of a faster drawdown in supply.

The two sides chose to remove about 1.8 million barrels per day (bpd) from the market in the first half of 2017 - equal to 2 percent of global production, taking October 2016 as the baseline month for reductions.

The most important issue for OPEC is to stabilise the oil market and prompt a draw on global inventories, Venezuela's oil minister Nelson Martinez said on Thursday.

Goldman Sachs warned that the biggest risk to oil markets was what would happen next year, at the end of the OPEC-led production cut. Oil gained almost 30 per cent in months following the agreement in November and has since stayed around the psychological safe haven of $50, partly due to buoyancy given by expectations of renewed cuts.

"It would appear a nine-month extension with the potential for deeper cuts was nearly fully priced in so when the statements were made, there was nowhere left for prices to go but lower".

Non-Opec producers, led by Russian Federation, were scheduled to meet Opec later in the day.

Amid expectations of the cuts being extended, the oil market remained stable.

OPEC and non-OPEC countries held a meeting in Vienna May 25 to make a final decision on extension of the oil output cut deal reached in 2016.

OPEC first suggested extending cuts by six months, but later proposed to prolong them by nine months.

OPEC sources have said the Thursday meeting will highlight a need for long-term cooperation with non-OPEC producers. And U.S. producers are poised to expand more, even if prices tick upward only moderately as a result of the oil-cut extension by OPEC and its partners.

The group could also send a message to the market that it will seek to curtail its oil exports. With crude prices above $50 a barrel from lows of past year, they are increasingly moving back into the market.

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