Crude output cut to help prop up prices
Opec’s decision is a positive step for a recovery in prices, which is expected in the range of $45 to $55 per barrel in the fourth quarter, from $40 to $45 a barrel now, analyst says
MUSCAT: Opec’s recent decision to cut crude oil output will eventually lead to a recovery in prices in the international markets, market analysts said.
The Organisation of Petroleum Exporting Countries (Opec) last week decided to reduce output to 32.5 million barrels per day from current production of 33.24 million bpd.
“We are looking at $50 per barrel as the base price for next year. Eventually, we will see a firm trend in the oil market.
The price of crude will hover in the range of $50 to $60 per barrel next year, which will be better for the Gulf Cooperation Council (GCC) countries to plan their budgets,” said Kanaga Sundar, head of research at Gulf Baader Capital Markets.
However, he noted that a formal decision will be taken at the Opec meeting on November 30. The Organisation of Petroleum Exporting Countries Opec produces more than 40 per cent of the world’s oil, so co-ordinated production cuts can have an immediate impact on global supply and demand balances. “No one was expecting this move. We need to see how member countries will go about it,” added Sundar. covery in prices. Clarity on these issues will emerge only after the Opec meeting on November 30.
In fact, the step to cut output clearly points to a surplus in the market as the countries were following a strategy of high production in the last two years, prior to the decision.
Goldman Sachs Group said Opec’s deal to cut output could add as much as $10 a barrel to oil prices, though it remains sceptical along with other banks on how the accord will be implemented, according to an agency report.
The plan to reduce production to a range of 32.5 million to 33.2 million barrels a day “will likely provide support to prices, at least in the short term,” Goldman said in a report, but maintained its crude forecasts for 2016 and next year. Uncertainty in the market will persist in the coming months, and output quotas could still be exceeded even if the proposal is ratified at a formal gathering in November, according to Goldman.
If strictly implemented in the first half of 2017, and if all else remains constant, the production quotas announced on Wednesday should be worth $7 to $10 a barrel to the oil price, Goldman analysts wrote in the report.
Members still have to sort out who will cut what, and the group usually overshoots its objectives by almost 5 per cent, according to Goldman, which will wipe out any effect from lowering targets.