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Oil edges up but remains on back foot after output cut extension disappoints

OPEC and some non-OPEC producers agreed to extend a pledge to cut around 1.8 million barrels per day until the end of the first quarter of 2018.

business Updated: May 26, 2017 17:26 IST
A worker walks past a pump jack on an oil field owned by Bashneft in Bashkortostan.
A worker walks past a pump jack on an oil field owned by Bashneft in Bashkortostan.(Reuters photo)

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

At Thursday’s meeting in Vienna, the Organization of the Petroleum Exporting Countries (OPEC) 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% following the announcement, only inching up a touch on Friday.

Gaining back some of those losses, Brent crude futures were at $51.83 per barrel at 0708 GMT, up 0.37 cents, or 0.7%, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were below $50, at $49.15, though still up 16 cents from their last close.

Despite these gains, analysts said markets were on the back foot.

“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,” said Virendra Chauhan, oil analyst at Energy Aspects in Singapore, referring to a statement by Saudi Arabia and Russia earlier in May that a nine-month extension to the cut was needed.

“With continued production out of the U.S. and, crucially, falling costs from producers in the rest of the world, OPEC’s great ... hope is that demand will grow fast enough to absorb its eventual resumption of supplies. With soft demand figures globally, that hope is fading nightly,” Dutch bank ING said.

Analysts 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 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% since mid-2016 to over 9.3 million bpd, close to the output of top producers Russia and Saudi Arabia.

“OPEC agreeing to nine months without deeper cuts leaves prices at the mercy of inventories and U.S. production and demand,” said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

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 already expect another price slump.