Supply concerns trigger oil price plunge after OPEC extension

OPEC has issued a decision to extend its production cuts by nine months, to March 2018.

Offshore staff

HOUSTONOPEC has issued a decision to extend its production cuts by nine months, to March 2018.

This action was signalled to some investors last week, whenSaudi Arabia and Russia agreed to extend their production cuts for that amount of time.

According to CNBC and others, some investors who were hoping the cartel would extend the cuts even further than that to help break down thesupply overbalance. This glut has contributed to the downturn of the last year by keeping prices from breaking out of the $50/bbl-range witnessed since OPEC announced last December its plan to cut 1.8 MMb/d. It was reportedly the first such cuts since 2008.

Speaking with CNBC on Tuesday in advance of the OPEC meeting, Helima Croft, RBC’s head of commodity strategy, said that she believed deeper cuts would be needed to get inventories below the five-year average. Croft said that she was “a little bit concerned if we just get a nine-month extension without a deeper cut [that] it would kind of be a non-event for the market.”

Ann-Louise Hittle,Wood Mackenzie’svice president, Research Macro Oils, felt differently about the decision, noting: “OPEC’s decision is a big one because it shows a commitment to support oil prices into 2018 - and potentially for all of next year.

“A firmer oil price will, we expect, further support the US tight oil industry into 2018. Today’s decision in Vienna sends a signal of continued support for oil prices from OPEC which helps US onshore drillers make plans.”

She added: “The extension through to the first quarter of 2018 makes it clear to the oil market that OPEC intends to continue to support oil prices at the expense of market share, at for the time being.

“For 2017, the OPEC decision today does not make a large difference to our oil price forecast. Our view since January has been that cuts would be extended through end 2017, and that fundamentals tighten in the second half of 2017.”

Today, CNBC also reported that oil prices fell to “fresh session lows,” due to disappointment among investors, with WTI dipping below $50 once again.

As of 12:24 ET, the news organization reported that Brent plunged 3.7% (or $2.02) to $51.94/bbl. US WTI crude was reported down 4.1% (or $2.11) to $49.25. The S&P 500 energy sector was trading down 1.2% for its worst day since May 4, CNBC concluded.

When OPEC announced the output cuts, the Wall Street Journal reported one-month highs in crude futures upon the news. Crude then settled to around$53/bbl in the days after the announcement.


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