Oil prices rise on expectation of output cut extension

Andrew Cummings
May 9, 2017

NEW YORK, May 5 (Reuters) - Oil prices closed 1.5 percent higher on Friday, rebounding from five-month lows, following positive U.S.jobs data and assurances by Saudi Arabia that Russian Federation is ready to join OPEC in extending supply cuts to reduce a persistent glut.

USA crude prices plunged more than 3% in a matter of minutes on Friday morning in Asia, taking the price of a barrel below $45 for the first time since a landmark OPEC deal in November to slash production.

On the New York Mercantile Exchange crude futures for June delivery added 70 cents to settle at $46.22 a barrel, while on London's Intercontinental Exchange, Brent gained 81 cents to trade at $49.17 a barrel.

After falling nearly 5 per cent yesterday, both contracts continued to collapse overnight with WTI falling to US$43.76, its lowest since November 15, and Brent down to US$46.64, its lowest since November 30 when the Organization of the Petroleum Exporting Countries (Opec) agreed to cut production during the first half of 2017.

After falling almost 5 percent Thursday to their lowest level in five months, crude oil prices are nearing a capitulation point, Goldman Sachs said in a report Friday.

One major reason behind the trend is the uncertainty whether OPEC and Russian Federation would extend their deal into the second half of the year.

While the steep price fall is likely to force Opec members to extend production cuts when they meet later this month, analysts do not expect producers to scale back output any further.

For the week ended April 26, the EIA said that crude oil inventories fell by 0.930 million, which was far less than expectations of a draw of 2.333 million barrels.

In November, OPEC signed a deal to curb production aimed at easing global oversupply. Sinopec sank 2.9% and PetroChina fell 2.1%. Oil recovered some of its losses later Friday, trading 0.5% lower at around $45.30 by late afternoon in Asia.

"Despite a possible extension of the OPEC agreement... prices are likely to continue their slide in Q2 and I see higher chances of them dropping below $45 than rising above $55", said Eugen Weinberg, head of commodities research at Commerzbank.

But the market is getting a bit "jittery" as countries decide whether to extend those cuts, he said.

At 527.8 million barrels, the inventory levels are still 3% higher compared to the same time past year.

"OPEC daily basket price stood at $47.44 a barrel Thursday, 4 May 2017, compared with $48.34 the previous day", the organisation said in a note to TheCable.

Goldman is referencing the current and future relationship between near-term and the long-term price of oil.

The recovery was due to a putative agreement between members of the Opec cartel and other major producers to restrict global output, reducing the glut of oil on the world's markets.

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