Oil prices falls 4% on Opec output cuts

Opec's cuts helped push oil back above $50 a barrel this year, giving a fiscal boost to producers

Opec and non-members led by Russia decided on Thursday to extend cuts in oil output by nine months to March 2018 as they battle a global glut of crude after seeing prices halve and revenues drop sharply in the past three years.

Oil prices dropped more than 4 per cent as the market had been hoping oil producers could reach a last-minute deal to deepen the cuts or extend them further, until mid-2018.

Brent crude oil was down $2.07, about 4 per cent, at $51.80 a barrel at 11.50 IST, after hitting a low of $51.32. US West Texas intermediate crude futures was trading $2.05 or 4 per cent lower at $49.31. WTI plunged as much as 5 per cent to a low of $48.75, breaking through $50 for the first time all week as volumes rose sharply. 

Opec's cuts have helped to push oil back above $50 a barrel this year, giving a fiscal boost to producers, many of which rely heavily on energy revenues and have had to burn through foreign-currency reserves to plug holes in their budgets.

Oil's earlier price decline, which started in 2014, forced Russia and Saudi Arabia to tighten their belts and led to unrest in some producing countries including Venezuela and Nigeria.

The price rise this year has spurred growth in the US shale industry, which is not participating in the output deal, thus slowing the market's rebalancing with global crude stocks still near record highs.

"We considered various scenarios, from six to nine to 12 months, and we even considered options for a higher cut. But all indications discovered that a nine-month extension is the optimum," Saudi Energy Minister Khalid al-Falih said.

He told a news conference he was not worried by what he called Thursday's "technical" oil price drop and was confident prices would recover as global inventories shrink, including because of declining Saudi exports to the United States.

In December, the Organization of the Petroleum Exporting Countries agreed its first production curbs in a decade and the first joint cuts with 11 non-OPEC producer nations, led by Russia, in 15 years.

The two sides decided to remove about 1.8 million barrels per day (bpd) from the market in the first half of 2017 — equal to 2 per cent of global production, taking October 2016 as the baseline month for reductions.

On Thursday, Opec and non-Opec agreed to extend cuts by the same 1.8 million bpd. The exact split between Opec and non-members will likely be different after Equatorial Guinea joined the organisation on Thursday, reducing the number of participating non-Opec nations to 10.

Despite the output cut, Opec kept exports fairly stable in the first half of 2017 as its members sold oil from stocks. Opec produces a third of the world's oil. Its production reduction of 1.2 million bpd was made based on October 2016 output of around 31 million bpd, excluding Nigeria and Libya.

Falih said Opec members Nigeria and Libya would still be excluded from cuts as their output remained curbed by unrest.

He also said Saudi oil exports were set to decline steeply from June, thus helping to speed up market rebalancing. He added that cuts could be extended further when Opec and non-Opec producers next meet in Vienna on November 30.

"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," said Gary Ross, head of global oil at PIRA Energy, a unit of S&P Global Platts.

Opec has a self-imposed goal of bringing stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion. "We have seen a substantial drawdown in inventories that will be accelerated," Falih said. "Then, the fourth quarter will get us to where we want."

Opec also faces the dilemma of not pushing oil prices too high because doing so would further spur shale production in the United States, the world's top oil consumer, which now rivals Saudi Arabia and Russia as the world's biggest producer.

"Less Opec oil on the market enhances the opportunity for American energy to fill needs around the world, and will help us achieve energy dominance," Ryan Sitton from the Texas Railroad Commission, which regulates the large Texan oil industry, told Reuters.

THESE FACTORS MIGHT MUTE THE IMPACT OF OUTPUT CUTS

The shale boom

Oil prices that topped $100 a barrel as recently as 2014 may have helped plant the seeds that are now weakening Opec.When oil prices plummeted in 2015 and 2016, output from shale in the US  fell around 900,000 barrels a day, equivalent to almost 1 per cent of the global supply.  Now, Opec’s biggest worry is a revival of American shale production, presenting the bloc with a thorny problem as it considers its own market moves.

The electric engine

A few years ago, high energy prices were sustained by a belief that the supply of oil was reaching a peak, but demand — driven by fast-growing economies like China and India — would keep rising. The trends are shifting, and fast. The increasing number of electric vehicles is playing a role in limiting demand for oil. Their impact may grow with the development of cars run by computers. Even some big oil companies are coming around to the view that demand for fossil fuels may soon decline.

 An erosion of clout

In decades past, an Opec decision to curb or increase production had wide consequences and would move markets. That is no longer the case. With that in mind, Saudi Arabia brought in Russia and other producers outside the cartel to lend clout to the recent production cuts. But adding those players has increased the complexity of presenting a united front. There is already disunity in the 13-nation bloc. Member countries like Iraq and Iran believe they are entitled to higher production because of years of revenue lost to conflict and sanctions, and will probably press for increases to their output allocations

Source: The New York Times

Reuters