OPEC Set to Prolong Oil Cuts

Carla Harmon
May 23, 2017

The most influential members of the deal, including Russian Federation and Saudi Arabia, have publicly backed supply curbs lasting until March 2018.

Saudi's Falih said on Monday he expected the new deal to be similar to the old one, "with minor changes".

Some said it could undermine efforts by OPEC and other major oil producers, to moderate that oversupply.

A part of the large series of amendments proposed by President Trump to the federal government on Monday was the White House's plan to cut the national debt which includes selling off half the size of US' emergency oil supply.

A release of US strategic reserves could jolt an already imbalanced oil market and undermine attempts by The Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russian Federation, to end a persistent glut. The supply reductions were initially meant to last six months from January, but the slower-than-expected decline in surplus fuel inventories prompted the group to consider an extension.

While OPEC has had some success reducing the oil glut, somewhat higher prices are helping its biggest foe: the shale industry.

The U.S. released supplies from the SPR amid supply concerns at the start of the Gulf War in 1991 and after Hurricane Katrina disrupted Gulf of Mexico output in 2005, and again 2011 amid concerns about lost Libyan supply.

Analysts say that soaring USA shale output is the reason for the greater security in its supply.

"It has been some time since we had such a strong consensus going into an OPEC meeting", BNP Paribas's commodities strategist Harry Tchilinguirian said.

"OPEC meets on Thursday amid increasing optimism that the production cuts agreed last November will be rolled over and most likely to the end of 1Q18", Colin Smith, analyst at Panmure, said in a note on Tuesday, adding he expected a rollover would "likely deliver a significant tightening of the market".

With the problem of shale output and the strategic petroleum reserve looming for next year, OPEC is in a hurry to hammer a deal now that reduces the glut. The Saudi oil minister secured the nation's backing for a longer extension after talks with his counterpart Jabbar Al-Luaibi.

Algerian Energy Minister Noureddine Boutarfa said on Tuesday that OPEC was discussing a possible nine-month extension, with curbs kept at the same level as under the group's existing deal.

PVM said if USA imports in coming years matched those of 2016, the country would need to keep 489 million barrels of oil in the SPR, some 140-150 million barrels above the proposed new level.

The deal "has been working and I know it will work even better for the second half", he said, before traveling to the Austrian capital.

Following the statements, WTI came off session lows and slightly extended gains to trade at $50.70 a barrel. He said the previous extension had helped to balance the market and maintain average prices. That's 6.2% higher than the price reached on the day of OPEC's last meeting on November 30.

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