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Oil prices rise in anticipation of extended OPEC-led output cut

Both benchmarks Brent and WTI have climbed over 16% from their May lows.

business Updated: May 25, 2017 12:50 IST
Prices have risen on a consensus that a pledge by OPEC and other producers to cut supplies by 1.8 million barrels per day.
Prices have risen on a consensus that a pledge by OPEC and other producers to cut supplies by 1.8 million barrels per day.(Reuters photo)

Oil prices rose ahead of an OPEC meeting on Thursday that is expected to extend output cuts into 2018, adding at least nine months to an initial six-month curb in the first half of this year.

Brent crude futures were trading at $54.39 per barrel at 0651 GMT, up 43 cents, or 0.8%, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were up 38 cents, or 0.8%, at $51.74.

Both benchmarks have climbed over 16% from their May lows.

Prices have risen on a consensus that a pledge by the Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, to cut supplies by 1.8 million barrels per day (bpd) would be extended into 2018, instead of covering only the first half of 2017.

Speculation was rife that the cuts may be extended by nine and possibly 12 months, said Jeffrey Halley, analyst at futures brokerage OANDA in Singapore.

The production cut, introduced in January, was initially only to cover the first half of 2017, but an ongoing glut has put pressure on OPEC and its allies to extend at a meeting in Vienna on Thursday.

James Woods, analyst at Australia’s Rivkin Securities, said that an extended production cut was already “factored into the price of oil”, adding that it was unlikely that a deeper cut would be announced at this stage.

“OPEC officials prefer ... to wait and see the impact of an extension in helping rebalance the market prior to taking any more drastic actions,” he said.

Energy consultancy Wood Mackenzie said a nine-month extension “would have little impact on our price forecast for 2017, which is for an annual average of $55 per barrel for Brent”.

It estimated that a nine-month extension would result in a 950,000 bpd production increase in the United States, undermining OPEC’s efforts.

U.S. oil production has already risen by more than 10% since mid-2016 to over 9.3 million bpd as its drillers take advantage of higher prices and the supply gap left by OPEC and its allies.

Should the meeting in Vienna result in a cut extension to cover all of 2018, Wood Mackenzie said the tighter market could push average 2018 Brent prices up to $63 per barrel.

Brent has averaged $53.90 per barrel so far this year.

The OPEC cuts have enabled U.S. drillers to export more, especially to Asia, with shipping data in Thomson Reuters Eikon showing that over 200,000 bpd of U.S. crude coming to Asia on average in the first four months of the year.

That compares to a daily average of just 36,000 barrels in all of 2016.