Extension of oil output cuts under study

Opec and non-Opec countries discuss measures to prevent prices from falling further

Ministers from Opec and non-Opec countries yesterday discussed extending cuts on production for another six months beyond June, in an effort to keep oil prices from falling further.

In December, the Opec and non-Opec producers agreed to cut oil output by 1.8 million barrels per day for six months to cut swelling inventories and balance the supply demand equation, a move that resulted in a price recovery.

Prices of Brent crude only a few weeks ago were threatening to break $60, but began to fall following reports last week of a growing surplus, due largely to surge in American shale oil. The renewed call to keep a cap on production comes as Brent crude prices approach the keenly watched $50 per barrel mark.

The Joint Opec/Non-Opec Ministerial Monitoring Committee (JMMC), who were meeting in Kuwait, said in a statement that “certain factors, such as low seasonal demand, refinery maintenance, and rising non-Opec supply, have slowed down the positive impact of the production adjustments on inventory drawdowns.”

The statement further said that group would “... review the oil market conditions and revert to the monitoring committee in April 2017 regarding the extension of the voluntary production adjustments... in order to ensure market stability.” Analysts said the oil producers have no other choice than talk about cutting more output.

The tone of the statement from the joint committee of Opec and non-Opec may not enthuse oil traders, who have been cutting record bullish positions in the commodity.

Brent crude prices are trading at the critical $50 (Dh183.6) per barrel mark, after falling by 12 per cent in the last few weeks, and analysts say prices may fall more.

“We might see oil prices under pressure on Monday on some disappointment on a lack of a recommendation,” said Giovanni Staunovo, commodities analyst at UBS said in an email.

Ole Hansen, head of commodity strategy at Saxo Bank agreed, saying “considering that anything but an extension could have very negative price consequences.”

Saxo Bank expects Brent crude to establish a new lower range between $50-54. “A break below however could see it challenge $46,” Hansen said.

The compliance on output cut has improved so far, the The Joint Opec/Non-Opec Ministerial Monitoring Committee (JMMC) said.

“The committee expressed its satisfaction with the progress made towards full conformity with the voluntary production adjustments and encouraged all participating countries to press on towards 100 per cent conformity,” the committee said in a statement.

Until February, the compliance level stood at 94 per cent, an 8 per cent increase on month, which according to the committee demonstrated the willingness of all participating countries to continue their cooperation.

“In order for an extension to have any impact 100 per cent compliance will be required during the first six months by all members of the group including Iraq and Russia,” Hansen said.

“Failure to achieve that over the coming months could pose a big challenge given recent comments from Saudi Arabia about it being against free riding,” Hansen added.

“We reiterate that the Opec and non-Opec production cuts are tightening the oil market and will drag down oil inventories over the coming months,” Staunovo said. “Also, Opec’s meeting on May 25 is a key date to watch. We expect the production curb deal to be extended with slightly higher supply volumes,” Staunovo added.

In December, the Opec and non-Opec producers agreed to cut oil output by 1.8 million barrels per day.