Oil price plummets despite deal to extend output cut

Lorlornyofm
By Lorlornyofm May 26, 2017 06:59

Oil price plummets despite deal to extend output cut

The price of oil has plummeted by about 5%, despite oil-producing nations agreeing to extend production cuts for a further nine months.

Meeting in Vienna, energy ministers from both Opec and non-Opec countries agreed to maintain output curbs, due to expire next month, until March 2018.

But investors had been hoping the oil producers would go further.

Brent crude is $2.60 lower at $51.36 a barrel, while West Texas Intermediate is down $2.58 at $48.78 a barrel.

Saudi Arabia’s energy minister, Khaled al-Falih, who co-chaired the meeting with his Russian counterpart Alexander Novak, said: “We considered various scenarios from six to nine to 12 months and we even considered options for higher cuts.

“All indications are solid that a nine-month extension is the optimum, and should bring us to within the five-year average of inventories by the end of the year.”

Opec countries and 11 other oil-producing nations, including Russia, first agreed to reduce production last December in an effort to boost flagging prices.

The reduction was almost 1.8 million barrels per day – equivalent to about 2% of global oil production.

Analysts criticised Opec’s failure to make deeper cuts to production.

Chris Beauchamp at online trading firm IG, described Mr Falih’s belief that greater reductions were not needed as “quaint”, while Alexandre Andlauer of equity research firm Alphavalue said Opec’s strategy was “old-fashioned”.

Neil Wilson at ETX Capital said Opec members “bottled it”, adding: “A nine-month extension just isn’t enough to really lift oil prices as we’ll continue to see US shale fill the gap. Having said they’d do whatever it takes, Opec is looking a bit toothless now.

“Faced with kind of glut and the scale of the market, the cartel would be better off cutting a lot deeper but for less time than trying to prolong fairly timid cuts.”

Gary Ross, head of global oil at PIRA Energy, part of S&P Global Platts, said: “Russia has an upcoming election and Saudis have the Aramco share listing next year, so they will indeed do whatever it takes to support oil prices.”


Analysis: Andrew Walker, BBC economics correspondent

Investors in the financial markets weren’t much impressed by this agreement. The price of crude oil has fallen.

The Vienna deal was perhaps the minimum they expected, after reports of widespread support among the countries concerned for a nine-month extension.

Some thought the production cuts might be deepened and were disappointed when the group simply extended the existing ceiling.

In any event Opec and the other countries involved have a problem with the American shale oil industry.

Cutting production creates a space in the market that shale producers can step into and higher prices make them more profitable. They will be the unintended beneficiaries of the Vienna agreement, even if it does succeed in the group’s objective of getting commercial stocks of crude oil down.

There is quite an irony in that. After all the rise of US shale is one of the central reasons Opec, Russia and the other countries had a problem to start with.

Source: BBC

Lorlornyofm
By Lorlornyofm May 26, 2017 06:59
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