OPEC, Russia set for oil cut extension

OPEC and Russia look set to prolong oil supply cuts until the end of 2018 this week while signaling that they may review the deal when they meet again in June if the market overheats. With oil prices LCOc1 rallying above $60 per barrel, Russia has questioned the wisdom of extending existing cuts of 1.8 million barrels per day until the end of next year as such a move could prompt a spike in U.S. production. Russia needs much lower oil prices to balance its budget than OPEC's leader Saudi Arabia, which is preparing a stock market listing for national energy champion Aramco next year and would hence benefit from pricier crude.

Six ministers from OPEC and nonOPEC oil producers including Saudi Arabia and Russia will gather in Vienna on Wednesday - one day ahead of a full OPEC meeting - to review recommendations by their delegates.

A joint OPEC/non-OPEC committee recommended extending cuts until the end of 2018 with an option of reviewing the arrangement at the next OPEC meeting in June, three sources from the Organization of the Petroleum Exporting Countries said.

"OPEC's nine-month option is really a six-month (or three-month) option as it will be re-evaluated at the next meeting," said Jamie Webster, director at the Boston Consulting Group's Centre for Energy Impact. The existing cuts expire in March.

Benchmark Brent and U.S. crude prices declined on Wednesday for a third consecutive day although Brent LCOc1 remained above $63. [O/R]

United Arab Emirates Energy Minister Suhail bin Mohammed alMazroui said that cutting output through all of 2018 was still the main, but not only, scenario. "We have seen very good results toward the market recovery. We still need to continue," he said.

The production cuts have been in place since the start of 2017 and helped halve an excess of global oil stocks although those remain at 140 million barrels above the five-year average, according to OPEC. Russia has signaled it wants to understand better how producers will exit from the cuts as it needs to provide guidance to its private and state energy companies. Some producers including Rosneft, run by an ally of President Vladimir Putin, Igor Sechin, have questioned the rationale of prolonging the cuts, saying it will lead to a loss of market share to U.S. firms, which are not reducing output. OPEC, which comprises 14 countries, has traditionally been much less worried about exit strategies as its members have been known for reducing compliance and cheating on their quotas toward the expiry of such deals.

"OPEC and Russia will both realize they are losing market share and they will be better off going back to a more competitive environment," the head of commodity research at Citi, Ed Morse, told Reuters.

Citi's rival Goldman Sachs said in a note: "We continue to expect a gradual ramp up in OPEC and Russian production from April onward." Oil prices fell on Wednesday on doubts OPEC and Russia will agree on extending a crude production cut to cover all of 2018, and after a report of an unexpected rise in U.S. crude oil inventories. U.S. West Texas Intermediate (WTI) crude futures were at $57.76 a barrel at 0749 GMT, down 23 cents, or 0.4 percent below their last settlement.

Traders said WTI was pulled lower by a report from the American Petroleum Institute (API) late that showed U.S. crude inventories rose by 1.8 million barrels in the week ended Nov. 24 to 457.3 million barrels. Official U.S. oil inventory data is due later on Wednesday.

WTI was also weighed down by the gradual restart of the Keystone pipeline, which supplies Canadian crude to the United States. Brent crude futures were at $63.31 a barrel, down 30 cents, or 0.4 percent. Oil prices have received a broad lift this year, with Brent up by 40 percent since mid-2017, due to an effort by the Organization of the Petroleum Exporting Countries (OPEC) and a group of other producers, led by Russia, to withhold 1.8 million barrels per day (bpd) of output.

The deal expires in March 2018, but OPEC will meet on Nov. 30 and is expected to discuss ways of extending the cut.

While OPEC and Russia are expected to extend their supply cuts for the whole of 2018, they are likely to include an option to review the deal in June, OPEC sources said, after Moscow expressed concerns the market could overheat.

"They plan to extend for 2018 but with the option to review the decision in June, i.e. they agree not to agree anything," said Ralph Leszczynski, head of research at shipping brokerage Bancosta in Singapore. Many analysts say an extension is needed to balance oil markets, and also to keep the economies of oil exporting nations afloat. But not all agree.

"Given the agreement doesn't expire for another four months, adding an additional nine months on that to the end of 2018 seems unnecessarily eager given the market does seem to be rebalancing," said Greg McKenna, chief market strategist at AxiTrader. Beyond cutting supplies, a healthy global economy has been helping oil markets back into balance after years of oversupply. U.S. bank Morgan Stanley said global economic growth was "likely to gain momentum and breadth in 2018".

With demand healthy and many producers profitable at current prices, hedging activity has picked up, energy consultancy Wood Mackenzie said.