Oil Markets remain Weak this Week Despite OPEC Cut in Production

Reuters

Oil markets remained weak on Friday after tumbling in the previous session when OPEC and allied producers extended output cuts but disappointed investors betting on longer or larger supply curbs.

Oil prices had risen in anticipation of a production cut that would have tightened markets till 2018. The trading on Wednesday had seen a rise in oil prices: Brent crude futures were trading at $54.40 per barrel at 0118 GMT, up 44 cents, or 0.82 percent from their last close and U.S. West Texas Intermediate (WTI) crude futures were at $51.76, up 40 cents, or 0.78 percent. Oil prices have increased by 16 % in the last month, when OPEC and non-OPEC countries decided to cut production.

At Thursday’s meeting in Vienna, the expectations of further cutting production dud not play out. The Organization of the Petroleum Exporting Countries and some non-OPEC producers agreed to extend a pledge to cut around 1.8 million barrels per day (bpd) until the end of the first quarter of 2018. The initial agreement would have expired in June this year. Crude oil plunged 5 percent following the announcement, and held its losses early on Friday.

Brent crude futures were trading at $51.47 per barrel at 0125 GMT, up just 1 cent from their last close and U.S. West Texas Intermediate (WTI) crude futures were back below $50, at $48.88, down 2 cents from their previous close.

Britain’s Barclays bank said the price falls were a result of some expectations ahead the meeting for longer or deeper production cuts. “Some market participants may have expected either a deeper cut, a longer one, inclusion of more countries, or other such icing on the cake,” the bank said.

Barclays said the ongoing production cut would result in a drawdown of bloated fuel inventories, but added that OPEC’s goal of bringing stocks down to their five-year average would not be reached within the timeframe of the production cut. Other analysts, including at Goldman Sachs and Jefferies bank said a normalization of oil inventories would occur in early 2018.
Analysts also said that the OPEC-led production cuts would support a further rise in U.S. output.

Ann-Louise Hittle, vice president at energy consultancy Wood Mackenzie said that the “decision in Vienna sends a signal of continued support for oil prices from OPEC which helps U.S. onshore drillers make plans” to further increase their production. U.S. oil production has already risen by 10 percent since mid-2016 to over 9.3 million bpd, close to the output of top producers Russia and Saudi Arabia.v“The growth in U.S. production is indeed daunting for the oil bull case,” Jefferies said.

Goldman Sachs warned that the biggest risk to oil markets was what would happen next year, at the end of the OPEC-led production cut.
With U.S. output rising steadily and OPEC and its allies potentially ramping up production in 2018 to regain lost market share, many traders are already expect another price slump.

Saudi Arabia has backed the extension of a global oil output cut deal, saying it will help to bring balance to the oil market and encourage investments in the oil sector, the United Arab Emirates energy minister said on Friday.
The agreement “will help motivate balance of the market,” Suhail bin Mohammed al-Mazroui said according to a statement on state news agency WAM.