Oil prices, crude inventories down
Oil prices fell slightly in trading on Wednesday following data from the US Energy Information Administration showing a smaller-than-expected drop in US gasoline stockpiles.
Brent crude ended the day down 19 cents to $53.96 and US light crude dropped by 11 cents, settling at $51.17.
Both benchmarks have gained over 10 per cent in recent weeks on optimism that OPEC would extend its supply cut pact which saw participants reduce production by 1.8 million b/d since the beginning of the year.
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On Thursday, OPEC and non-OPEC members who joined the supply reduction agreement will meet in Vienna to make a decision on extending the pact at least six months and possibly to the end of the first quarter of next year.
“While consensus is growing on extending the cap by another nine months, a deeper cut is unlikely,”Abhishek Kumar, Senior Energy Analyst at Interfax Energy’s Global Gas Analytics in London told Reuters.
According to a Reuters source, on Wednesday, a multination ministerial committee made up of some OPEC and non-OPEC members recommended keeping cuts at the same level.
“A nine-month extension of the production cuts agreed six months ago is meanwhile regarded as a done deal,” Commerzbank said in a note.
“After all, OPEC’s target of bringing global stocks back to the five-year average level is still far from achieved.”
Analysts believe the cuts are beginning to show results in global crude inventories.
EIA data showed US crude inventories fell for the seventh straight week, down 4.4 million barrels, as refiners processed a near-record amount of crude in the week ending May 19. Gasoline stockpiles also fell 787,000 barrels against expectations of a 1.2 million barrel draw.
Increasing US production could overshadow OPEC cuts. BMI Research is predicting from 2018 onward, markets will return to oversupply, but at a lower level than 2013-2016.
Using the market structure known as contango to their advantage, US drillers have sold higher value future production to finance their expanded output.
Reuters reports Goldman Sachs is suggesting the oil futures price curve should be pushed into backwardation which would make forward prices lower than current values.
Backwardation may help reduce inventories, but it is less clear how OPEC could alter the forward price curve or if that would stop production from increasing.