Oil prices rise on expectation of output cut extension

An oil derrick and wind turbines stand above the plains north of Amarillo Texas U.S
An oil derrick and wind turbines stand above the plains north of Amarillo Texas U.S
Author

08 May, 2017

Brent crude was up just 3 cent at $49.13 a barrel by 0959 GMT (5.59 a.m. ET), after trading as high as $49.92 earlier in the session.

Meanwhile Russia has said it supported extending the deal.

Oil prices rose on Monday on a growing conviction that an OPEC-led production cut initially scheduled to end in June would be extended to cover all of 2017, although a relentless increase in US drilling activity is seen capping gains.

"I do believe that the worst is clearly behind us with multiple leading indicators showing that supply and demand balances are clearly in deficit and the market is moving towards rebalancing".

The pessimism about the oil market is overdone and the prices are expected to rise over the second half of 2017, says an analysis done by the UK-based consulting company Capital Economics.

Falih told reporters in January an extension would probably not be needed ("Saudi energy minister: unlikely to extend producers' agreement", Reuters, Jan. 16).

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The analysis, obtained by Trend, shows four reasons why the current weakness in oil prices will not last long.

USA drilling for new oil continued to pick up last week, with the rig count climbing by 6 to 703. But, prices remain near their lowest since the Organization of Petroleum Exporting Countries signed a six-month deal to curb production in November.

With hedge funds embarking on a fresh cycle of short selling in oil, OPEC ministers seem to have concluded it was no longer practical to wait another two weeks until their formal meeting on May 25.

Despite this, Al-Falih said that markets had improved from last year's lows, when crude prices fell below $30 per barrel. Oil has surrendered most of its gains since their deal late a year ago.

"Data (for production and storage levels) is unlikely to help turn this move into something more sustainable".

From a bullish perspective, Falih confirmed Saudi Arabia and other oil producers are prepared to do "whatever it takes" to bring global crude inventories back to the five-year average. "OPEC members have no choice but to talk up prices by signaling an extension to the production cuts agreement".


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