OPEC likely to extend output cuts, but price relief elusive

Dr. Mohanad Al-Shaikh

Dr. Mohanad Al-Shaikh

Kuwaiti Oil Minister Essam al-Marzouq said on Tuesday not all OPEC countries and its allies supported a nine-month extension and producers would discuss this week whether to extend output cuts by a six or nine months. That added to the backing for another nine months of cuts from the most influential participants in the deal, including Russia, Saudi Arabia and Iraq.

Potential sales from a bid to cut the U.S. Strategic Petroleum Reserve by more than half over the next decade would be "negligible" relative to the size of OPEC's output curbs and the global oil market, the bank said in a May 23 report.

"Oil soared ... as rumors swirled that OPEC... was considering recommending the double whammy of a production cut extension and deeper cuts ahead of this Thursday's meeting", a Singapore-based OANDA analyst Jeffrey Halley, said.

In the United States, crude inventories probably slid by 2 million barrels last week, according to a Bloomberg survey before data from the Energy Information Administration Wednesday, as the White House outlined plans to sell strategic stockpiles to help trim the national debt. "It will grow but there are limits".

Kuwait's oil minister said production agreements from possibly two dozen non-OPEC members could support the effort to balance the market.

"The longer the commitments by OPEC and non-OPEC for stabilizing the market, the more certainty there is in the market, which is good for all the stakeholders".

Several delegates and ministers including Algeria said they did not believe cuts could be extended to a full year.

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Last week, Saudi Arabia and Russian Federation telegraphed the events of the May 25 meeting, announcing support for a nine-month extension of the existing production cuts - 1.2 million barrels per day (mb/d) from OPEC plus 558,000 barrels per day (bpd) from a group of non-OPEC countries.

Early in the session oil prices fell following news of a White House plan to sell half the 688 million-barrel US oil stockpile from 2018 to 2027. But it also spurred growth in the U.S. shale industry, which is not participating in the output deal, thus slowing the market's rebalancing.

Benchmark Brent crude oil was up 10 cents a barrel at $54.25 by 1210 GMT.

Fundamentals for the oil market were generally positive on Wednesday and inventories declined, but much of the favourable news had been priced in which encouraged profit taking. The country was the only OPEC member allowed to increase its output under the supply cut deal.

Before, OPEC's strategy was to keep pumping at full tilt in order to push the oil price lower and make life hard for the Americans, who need a higher price to make money. "Tomorrow we will discuss the possibility of extending by another three months (to June 2018)", Novak said. "I think that the majority is supporting nine months", he said.

"The inclusion of smaller producing non-OPEC countries such as Turkmenistan, Egypt and the Ivory Coast would be a negligible boost, in our view", Deutsche said.

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