OPEC to Extend Oil Supply Cuts Until End of 2018

OPEC and other top oil producers have agreed to extend their production cut deal for another nine months to reduce the supply glut in the market.

OPEC

The Organization of the Petroleum Exporting Countries (OPEC) and other top oil producers have agreed to extend their output cuts until the end of next year in an effort to rebalance the market.

Last year, OPEC members and other top producers, including Russia, agreed to reduce supply by about 1.8 million barrels per day to boost oil prices. The deal, which ends in March, has now been extended for another nine months until the end of 2018.

The market was widely expecting the move, but investor optimism was clouded as the cartel had also pointed to an earlier exit from the deal if the market was not reacting as expected.

Before Thursday’s (November 30) meetings between OPEC and the other producers, Saudi Energy Minister Khalid al-Falih said it was premature to talk about ending the cuts at least for a couple of quarters, and added that OPEC would examine progress at its next regular meeting in June. “When we get to an exit, we are going to do it very gradually … to make sure we don’t shock the market,” he said.

The Iraqi, Iranian and Angolan oil ministers also said before the meetings that a review of the deal was possible in June in case the market became too tight.

“It’s not a clean nine-month extension, so that’s going to hurt their efforts, at least price-wise in the short-term,” said John Kilduff, a partner at Again Capital, a New York-based hedge fund. “It appears they are going to revisit everything here in June.”

Meanwhile, Iran’s energy minister, Bijan Zanganeh, announced that Nigeria and Libya will be included in the deal. Both countries had been exempt from cuts due to unrest and lower-than-normal production.

“OPEC extending the output cut till the end of 2018 was widely anticipated; however, suggestions that both Nigeria and Libya have decided to cap production is a bullish signal,” commented Abhishek Kumar, senior energy analyst at Interfax Energy’s Global Gas Analytics in London.

Ahead of the meetings, Russia was said to be concerned with the duration of the extension and how to exit the deal. If prices rally too fast, the US could boost production further, an outcome that OPEC and Russia are trying to avoid.

“After all the grandstanding comments from Russia it looks like we are going the get the inevitable 9 months extension,” said Ole Hansen, head of commodity strategy at Saxo Bank. “Global supply and demand forecasts left no room for the group to make any adjustments at this stage.”

After the announcement, spot oil prices remained mixed, with January West Texas Intermediate crude falling 0.52 percent, to $57 a barrel, on the New York Mercantile Exchange. Meanwhile, Brent crude for February on London’s ICE Futures Exchange was down 0.4 percent, at $62.26 a barrel.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

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