Opec Extends Cuts with Russian Support

Seeking to mop up the crude oversupply, Opec and some non-Opec members led by Russia agreed to continue their reduced output by another nine months as prices have firmed above $60/barrel. Their co-operation agreement was to have ended in March but now will run to December next year. The move was expected and analysts did not need to change their oil price forecasts.

The cartel built in an escape clause for its June 2018 meeting if the market overheated, allowing production to rise. With ready-to-drill US shale oil production able to step in at short notice however in response to high prices, that might not be necessary.

Addressing the meeting in Vienna before the decision was formalised, Saudi Arabia's energy minister and Opec conference president Khalid A Al-Falih said: "We have... witnessed the market structure flipping into backwardation for both Brent and WTI for the first time since 2014, indicating the market’s gradual move towards a more balanced condition. All in all, market stability has improved and the sentiment is generally upbeat. The rebalancing trend has accelerated and inventories are on a generally declining trend. This gratifying outcome has resulted primarily from a near 100%... compliance to the production targets by the combined Opec 12. Opec’s credibility has also been enhanced, although a couple of members have lagged behind."

Aside from compliance with the cuts, he also mentioned the need for Opec to "engage on environmental issues, emphasising the concurrent importance of reducing the carbon footprint of oil, the need for a combination of conventional and emerging energy sources, and the importance of developing a realistic global energy pathway to the future."

Without extending the cut, analysts Wood Mackenzie said November 30, the oversupply would have grown in each quarter of 2018, as 2.4mn barrels/day of extra oil came to market. 

With the rollover in place and the same level of adherence through 2018,Wood Mackenzie expects a 1.8mn b/d year-on-year gain in world oil supply. "With the extension, the supply and demand balance tightens in H2 2018 and helps lift prices in the second half of the year. We expect a pullback in H1 2018 because of resumption of oversupply in the  first two quarters," it said.