Current OPEC supply cut pact runs out in June
Members of the Organization of Petroleum Exporting Countries and non-OPEC nations who participated in the OPEC supply cut pact are close to securing a deal which would see the agreement to clear the stubborn global oil glut be extended for an additional nine months.
On Thursday, OPEC representatives will meet in Vienna to discuss the extension of the deal that has seen most cartel members along with 11 non-members cut production by about 1.8 million barrels per day (b/d) since the beginning of the year.
According to Reuters, on Wednesday, Kuwait signalled OPEC could discuss making deeper cuts, however, one OPEC delegate told Reuters, “unless Saudi Arabia initiates it with the biggest contribution and is supported by other Gulf members”.
Two OPEC sources told Reuters a ministerial committee made up of OPEC members Algeria, Kuwait, Venezuela, Saudi Arabia as well as non-cartel members Russia and Oman recommended keeping current levels of cuts.
In a statement, the committee recommended extending the cuts by an additional nine months to March 2018.
When asked about if the committee had agreed on the nine-month extension, Saudi Energy Minister Khalid al-Falih gave the thumbs up.
“Before the end of the year, prices may go above $55 a barrel,” Algerian Energy Minister Noureddine Boutarfa told Reuters prior to the committee meeting. He added that an extension by nine months should help clear the glut by the year-end.
Saudi Arabia and Russia have also said that by extending the production cuts by nine months, the rebalancing of the market will be sped up and oil prices would not likely fall back below the $50/barrel mark.
“OPEC has already achieved a lot. They stopped the oil market surplus from building even before they started cutting,” Gary Ross, head of global oil at PIRA Energy told Reuters.
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So far, most OPEC ministers, including Iraqi Oil Minister Jabar Ali al-Luaibi, have supported extending the cuts by nine months.
Iranian Oil Minister Bijan Zanganeh, who has clashed with Saudi Arabia at many previous OPEC meetings, said he believes an extension of six to nine months is possible.
Under the current OPEC supply cut agreement, Iran was given an exemption to raise its output after it had been curtailed by years of Western sanctions. In recent months, Iran’s output has stagnated.
On Wednesday, oil prices were trading around $54/barrel.
The recent increase in oil prices from has caused a jump in production in the US shale industry, which has slowed the market’s rebalancing.
“Production cuts cause higher prices which will incentivize more production for the U.S. shale oil and reduce the impact of the production cuts. So it’s a bit cyclical,” Sushant Gupta, research director for consultancy Wood Mackenzie said in an interview with Reuters.
OPEC’s goal is to bring stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion.
“Thankfully, things are improving and we started seeing a draw in inventories in the United States,” Boutarfa said. The Algerian Energy Minister says he believes inventories should decline to their five-year average by the end of 2017.
Reuters reports one industry source close to OPEC said the cartel could also send a message on tightening exports but it was unclear how that could be presented on Thursday.