Published: Tue, May 16, 2017
Money | By Armando Alvarado

Oil stable on expectations of extended OPEC-led production cut

Oil stable on expectations of extended OPEC-led production cut

Earlier this year, Saudi Arabia's Minister of Energy and Industry echoed Alan Greenspan in warning against "irrational exuberance" that his country, or OPEC, would support oil prices simply so rivals could get a free ride. BP (BP) added 1.3%.

Oil prices hit a three-week high after the announcement, while shares of oil majors Exxon and Chevron were up 1 percent in premarket trading.

The supply cut agreement that came into action at the beginning of the year didn't support oil prices due to a rise in the oil inventory and an increase in USA shale oil production.

Since OPEC announced the production cut deal at the end of November, industry analysts have been warning that rising production from producers outside the deal-U.S. shale in particular-is effectively capping the oil price gains from that agreement.

The advances came after energy ministers of Saudi Arabia and Russian Federation said in a joint statement that they endorse a nine-month extension (http://www.marketwatch.com/story/saudi-arabia-russia-back-9-month-extension-to-opec-output-deal-2017-05-15) to current production cuts-three months longer than expected.

Goldman sees long term oil prices at $45-$55 per barrel, but USA producers have already said they plan to boost production at those prices. The two countries agreed Monday to lower their production levels for nine months longer than originally agreed, through March.

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Under the agreement, Opec countries were to cut production by 1.2 million barrels a day, while the Russian-led non-Opec nations agreed to reduce output by 600,000 barrels a day.

One indicator of a potential shortfall in available takeaway capacity in the Permian is a negative spread between the price of West Texas Intermediate (WTI) crude oil at Midland, Texas, and the price of WTI at Cushing, Oklahoma.

"The market will also be looking at export cuts and not just production cuts, which is what is required to rebalance the market". U.S. crude rose 2.72 per cent to $49.14 per barrel and Brent was last at $52.09, up 2.46 per cent on the day. If we can break down a bit from current levels, which of course at the time of recording are 1.3650, I think that the market goes back down to the 1.36 handle. If the price of oil was to crash to US$40 or even US$30 per barrel, a major part of those DUCs would still be commercially viable for completion, due to the fact that "drilling costs are sunk", Rystad said.

The extension of the cut into the first quarter of next year will initially be on the same volume terms as before, although the ministers said they hoped other producers would join the efforts. Unlike oil prices, which are determined on a global market, natural gas and NGLs trade on regional markets.

Following the Russia-Saudi statement, Kazakh Energy Minister Kanat Bozumbayev said "Kazakhstan should follow the trend", in comments reported by Russia's RIA Novosti agency.

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