Thursday, 24 January, 2019

Oil drops after OPEC-led output cut extension falls below expectations

Nellie Chapman | 01 June, 2017, 01:31

U.S. West Texas Intermediate (WTI) crude futures were below $50, at $49.15, though still up 16 cents from their last close. It finally agreed last November to cut output, in accordance with Russian Federation, which is not an OPEC member, but the world's biggest crude oil producer.

David Arrington, president of shale oil producer Arrington Oil & Gas in Midland, Texas, said that how US producers respond in coming months will have as much of an effect on pricing as OPEC's cuts.

"With Russia and Saudi announcing nine months (of extended cuts) a week before, this was already priced in, so the market wanted the "over-and-above" which didn't come - hence the sell-off", oil analyst at Energy Aspects in Singapore, Virendra Chauhan told Reuters. A continuation of the earlier level of cuts was perhaps the minimum they were expecting.

"The negative oil reaction to a 9-month OPEC production cut extension is a prime example of "buy the rumour, sell the fact". Nigeria and Libya will remain exempt from making cuts and Iran, which was allowed to increase production under the original accord, retains the same output target, said Kuwait's Oil Minister Issam Almarzooq.

Crude prices tumbled 5 percent following the decision on Thursday and extended losses on Friday.

The move, which was then ratified by non-OPEC producers, was the base-case scenario for the market and means the 1.8 million barrel per day supply cut will roll over until the first-quarter of 2018.

India is one of the biggest oil importers and Pradhan sought to highlight that the annual refining capacity has grown to 235 MMT, of which 194 MMT of products are consumed domestically, while rest is exported.

And some traders' fears have been compounded by the increased output from United States shale - capable of making a profit at lower margins than traditional plays - as well as Donald Trump's influence in the White House.

The 1.8 million barrel-per-day cut first inked in November 2016 will now last until November 2018. "The days of OPEC using oil supplies and prices as a political weapon are gone". A further 8 U.S. oil rigs were added last week, bringing the total count up to 720, the most since April 2015, and it is very likely this trend will continue at current oil prices. Historically, OPEC has played a pivotal role in balancing the market, but the group's market power has become increasingly diluted owing to the emergence of USA shale production.