OPEC Poised for ‘Safe Bet’ of Nine-Month Extension of Oil Cuts

  • Saudi Arabia’s Al-Falih said option should ‘do the trick’
  • U.A.E. minister says shale oil surge to be absorbed by demand

Nigeria Minister of State: Petroleum Emmanuel Ibe Kachikwu discusses OPEC's 9 month production cut extension, the possible extension of an additional 3 months, the U.S. Shale market and his outlook for oil prices. He speaks on 'Bloomberg Daybreak: Europe.' (Source: Bloomberg)

OPEC and its allies were poised to extend their production cuts for an additional nine months after last year’s agreement failed to clear a global supply glut or deliver a sustainable price recovery.

Maintaining the same level of production through March 2018 “is a very safe and almost certain option to do the trick,” Saudi Arabian Oil Minister Khalid Al-Falih said at the opening session of the group’s meeting in Vienna. “It’s likely we’ll be balanced earlier than later.”

Saudi Arabia Energy Minister Khalid Al-Falih says a 9-month extension is a "safe bet."

Source: Bloomberg

Six months after forming an unprecedented coalition of 24 nations and delivering output reductions that exceeded all expectations, resurgent production from U.S. shale fields has meant oil inventories remain well above the level targeted by OPEC ministers.

Still, Al-Falih said the curbs were working, with stockpile reductions to accelerate in the third quarter. While he expects a “healthy return” for U.S. shale, that won’t derail OPEC’s goals and proposals for deeper cuts were deemed unnecessary. Libya and Nigeria will remain exempt from the output curbs, he said.

Oil fell prices fell as the meeting opened. Brent crude dropped as much as 2.2 percent in London and was down 0.5 percent at $53.68 a barrel at 10:53 a.m. Some investors were disappointed after speculating OPEC might announce some additional action, said Giovanni Staunovo, an analyst at UBS Group AG.

The oil market is also looking for clues as to what OPEC may do in 2018, a year when U.S. shale output growth is expected match the increase in demand. There’s concern about whether OPEC could return to the free-for-all production that caused prices to slump from 2014 to 2016.

OPEC Options

“We have said we will do whatever it takes,” said Al-Falih, commenting on the potential for action beyond March 2018.

The nine-month extension to be discussed Thursday could include an option for an extra three months, according to ministers from Russia and Nigeria. That’s similar to last year’s accord which included the option for an extra six months.

While an extension of that length at the same output levels is the best option, there are various proposals, including one with deeper cuts, said Iraqi Oil Minister Jabbar Al-Luaibi. “If this is approved, Iraq will comply,” he said.

Extending the deal will bring producers prices stability, Nigerian Oil Minister Emmanuel Kachikwu said in a television interview before the meeting on Thursday.

“If we keep to the rules, if we keep to the discipline -- all the numbers show good compliance -- then we should look at a $50 floor,” he said. “On a positive note, on an optimistic note, lots of us hope we can crawl back to $60.’’

The Organization of Petroleum Exporting Countries and 11 non-members agreed last year to cut output by as much as 1.8 million barrels a day. The historic pact affected everything from the valuations of U.S. shale producers to the foreign exchange rates of energy-dependent nations such as Brazil and Nigeria.

The supply reductions were intended to last six months from January, but initial confidence in the deal, which boosted prices as much as 20 percent, waned as inventories remained stubbornly high and U.S. output surged.

You can follow our TOPLive blog on the OPEC meeting in Vienna on Thursday here.

U.S. crude production rose to 9.32 million barrels a day last week, an increase of 550,000 this year to the highest since August 2015, according to data from the Energy Information Administration. That wipes out almost a third of the supply reduction from OPEC and its allies and the output surge could double by year-end, consultant IHS Markit Ltd. told the group at a meeting last week.

Increasing shale output will be absorbed by stronger demand, United Arab Emirates Energy Minister Suhail Al Mazrouei said before OPEC started its ministerial meeting.

“U.S. shale oil producers have been so far focusing on the sweet spots,” Mazrouei said in Vienna. “Now they have to move to other areas. I don’t believe that they are able to increase production by 1 million barrels a day next year. I don’t.”

— With assistance by Mahmoud Habboush, Manus Cranny, Anthony Dipaola, Laura Hurst, Angelina Rascouet, Elena Mazneva, Wael Mahdi, Javier Blas, and Rakteem Katakey

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