The agreement to extend the oil production cut by nine months has made things more predictable, which is very important for all the stakeholders in this space.

MINISTERS of the Organization of the Petroleum Exporting Countries (OPEC) met earlier this week and also had consultations with their non-OPEC counterparts. They decided to extend the 1.8 million barrel-per-day (bpd) production cuts for nine months, as was widely expected. Several OPEC ministers had indicated as much during the preceding weeks. Yet the markets did not like the result, and the oil price initially tumbled around 5 percent in Asian trading but later made a recovery.

Markets clearly wanted to see more. When OPEC ministers signaled the dimensions of the deal as early as a few weeks back, oil rallied. When the deal was confirmed, oil fell. It was a classic case of “buy the rumor, sell the fact.”

Whichever way we look at the situation, all of the three big energy agencies — OPEC, the International Energy Agency (IEA) and Energy Information Administration (EIA) — expect markets to balance during the second half of the year, taking the production cuts and demand growth forecasts, of an additional 1.3 million bpd, into consideration. Inventories will go down gradually and over time; this is a marathon, not a sprint. nine months. They will, because they have everything to lose from non-compliance, but stand to gain from meeting the terms of the deal. Russia’s 300,000 bpd cut is half of the overall non-OPEC total. This is a lot in terms of the agreement, but a negligible amount in terms of Russia’s overall production, which exceeds 10 million bpd. Revenues generated from the uplift in price will more than make up for losses from the foregone production.

There is always anxiety about the incremental production of shale oil. The US shale producers came back with a vengeance when the oil price rose, although shale is relatively expensive to produce. The shale producers more than doubled their productivity over the last few years. However, there are limits to how much the Permian Basin can give and at what speed. Also, the entry of Big Oil into that space may have an impact on the agility because big companies are more bureaucratic and move more slowly than small ones.