Oil prices fall on OPEC supply cuts disappointment

Oil prices
Oil prices are on track for their biggest drop in three weeks, despite OPEC extending its supply cut agreement to March, 2018 at the cartel’s meeting in Vienna on Thursday.  OPEC photo.

Oil prices down 4 per cent

Oil prices fell about 4 per cent in trading on Thursday and are on track for their biggest drop in three weeks, after OPEC announced it will extend current production curbs for a further nine months, but will not deepen the cuts.

Price were buoyed in recent days on talk of a possible 12 month extension or deeper cuts, which would result in a faster reduction in the global crude glut.

According to a Reuters report, Saudi Arabia’s Energy Minister Khalid al-Falih, said he did not see the need to reduce crude output further.

“There have been suggestions (of deeper cuts), many member countries have indicated flexibility but … that won’t be necessary,” said Falih.

Speaking with Reuters, Abhishek Kumar, senior energy analyst at Interfax Energy’s Global Gas Analytics disagreed. “Members participating in the output deal failing to agree on deeper cuts have given a bearish signal to the market as an extension alone may not rebalance the market fast enough.”

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Brent crude fell $2.07 to $51.89/barrel by 1:02 p.m. EDT and US WTI were down by 4 per cent to $49.31/barrel.  Earlier in the day, WTI had plunged as much as 5 per cent to a low of $48.75/barrel.

Both benchmarks were on track for the biggest percentage decline in three weeks.

Speaking in Vienna, OPEC representatives from Nigeria and Iraq said they were not concerned about the drop in prices, saying it was and ordinary price fluctuation following an OPEC decision.

Falih said if necessary, the cartel could extend the cuts further at the next OPEC meeting in November.

According to the Saudi minister and OPEC Conference President, seven weeks of US crude drawdowns and a reduction in floating storage were excellent news and he foresees a healthy long-term trend.

Futures market activity, however, shows a less optimistic expectation for the rebalancing of the market.

“I don’t think the cuts are enough for [OPEC] to reach their goal in a nine month period and this is reflecting that,” James Williams, president of WTRG Economics in London, Arkansas told Reuters.

Large volumes of floating storage, weaker-than-expected demand in countries like India and increased US shale production have undercut OPEC’s efforts.

US oil production is up by over 10 per cent since the middle of last year and now sits at over 9.3 million b/d.  RBN Energy says OPEC’s contribution to the supply cut pact, 1.2 million b/d, could be nullified by rising US production by the end of the year.

American producers say they can remain profitable if US crude trades between $45 to $50/barrel.

“Everyone is watching (the price of oil) with trepidation, not jubilance,” David Arrington, president of shale oil producer Arrington Oil & Gas in Midland, Texas told Reuters.

He added that the way shale producers respond in coming months will have as much of an effect on pricing as OPEC’s cuts.

“If U.S. shale producers exceeded our projected increases, it’ll drive the price down again,” Arrington said.