Published: Fri, May 26, 2017
Worldwide | By Gretchen Simon

Oil prices rise in anticipation of extended OPEC-led production cut

OPEC and other oil nations meeting Thursday were set to extend their production cuts in an effort to shore up prices.

U.S. West Texas intermediate crude futures CLc1 was trading $2.05 or 4 percent lower at $49.31.

The U.S. benchmark gained more than 1% to hit its strongest since April 19 at $52.00 in overnight trade.

Oil weakened after OPEC was said to agree to extend output cuts for another nine months, disappointing investors who had hoped for more.

OPEC has for weeks been laying the groundwork to extend production cuts.

That could increase supplies and drag down prices again.

Brent crude is 1.6% lower at $52.35 a barrel following confirmation of the extension until March 2018, while U.S. oil is down 3.2% at $49.73.

Iran s Oil Minister Bijan Zanganeh said that the "goal" at the moment was a price of $55-60 per barrel, saying this was "good for both" shale and conventional producers.

The oversupply of oil in the market should not persist past the third quarter as inventory numbers are declining and continue moving in a downward trend despite higher USA production and high levels of imports, said Patrick Morris, CEO of New York-based HAGIN Investment Management.

However, a decision on deeper output cuts is unlikely on Thursday, sources have said.

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You see, American shale oil is expensive to produce, but when oil prices rise, like they did after November 30, this shale oil becomes much more profitable.

The agreement proved to be partially successful, as it managed to keep the prices oil prices above $50 per barrel, giving a fiscal boost to major producers.

At a press conference in Vienna, Saudi Arabia's Energy Minister Khalid Al-Falih said he hopes USA shale producers will moderate their growth.

With the deal due to expire at the end of June, one participant said the group had opted for a nine-month extension.

Brent has averaged $53.90 per barrel so far this year.

And U.S. producers are poised to expand more, even if prices tick upward only moderately as a result of the oil-cut extension by OPEC and its partners. Looked at in other ways, new US production has been more than double the volume of Russian production cuts; it effectively annulled 35 percent of OPEC's total cuts, or 27 percent of OPEC and non-OPEC cuts combined.

Michael Cohen, head of energy markets research at Barclays, said the market may have been looking for "the icing on the cake", such as deeper output cuts or limits on exports.

"Shale is a important variable but we don t believe it is going to significantly derail or affect what we are doing", he said.

The nation's long-term reliance on oil has caused economic pain in recent years as internal problems meant the country was unable to match its historic production levels.

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