Opec and its non-member partner countries today reached a deal to roll over their output cuts for another nine months, a widely expected decision aimed at showing their commitment to speed up the reduction of the world’s oil glut.
“All indications are solid that a nine-month extension is the optimum and should bring [world crude oil inventories] within the target five-year average by the end of the year,” said Khalid Al Falih, Saudi Arabia’s oil minister, announcing the deal in Vienna.
He said Opec and its partners had considered a range of options, including shorter and longer extension periods and deeper cuts to production, but had decided that the nine months would be enough.
Oil prices dropped sharply on the news of the deal and the fact the cuts would not be deeper. North Sea Brent crude futures were down nearly 4.5 per cent at US$51.57 in early evening trading Arabian Gulf time.
The Russian oil minister, Alexander Novak, said the historic deal reached last December, which joined 11 non-member countries with Opec to cut nearly 1.8 million barrels a day (bpd) – or around 2 per cent of world production – had so far made good progress in starting to eat into the inventory glut.
Since it took effect in January, the cuts have helped keep prices mostly in the range $50 to $55 a barrel this year, versus an average of $45 a barrel for all of last year.
“There had been a lot of scepticism around the deal in December but for the first time non-Opec has participated in a deal like this and achieved very good results,” Mr Novak said at a joint Opec, non-Opec producers press conference. “I can assure you that cooperation between Opec and non-Opec will continue as it has.”
Progress has been slow and patchy, however, particularly in the United States where the shale oil that had been discouraged off the market last year has come roaring back, and where inventories remain about 10 million barrels above last year’s level and well above the historic average.
There is a general expectation that solid demand across the globe and a ramping up of activity by refineries, particularly in Asia, that had been down for maintenance, will see demand rise sharply in the second half of this year.
“Prices are likely to continue to move higher as we move into the summer... and refinery margins have also remained good; that’s a positive sign,” said Michael Cohen, the head of energy markets research at Barclays Bank.
“But the key risk here is that as we move into next year there are other moving parts in addition to just Opec supply,” Mr Cohen added.
Specifically, there are large projects scheduled to come onstream in the first quarter of next year in Brazil, the US, Canada and the North Sea – all areas outside the output restraint deal.
This was recognised by Mr Al Falih who said the groups would continue to monitor market conditions, starting with a meeting in Russia in July, of the market monitoring and technical committees that are also charged with assessing compliance by the 24 countries in the deal.
They have also scheduled another full joint ministerial meeting for November 30.
“We recognise there are too many varaibles in the market we may not have in our projections today,” said Mr Al Falih. “So we have empowered the committees to evaluate the level of conformity but also to assess market fundaments and where we are in bringing our inventories down to the five-year average and making any adjustments needed.”
Opec and its partners also announced that they are creating the framework to make their cooperation permanent from next year, creating a group that initially will account for about 55 per cent of world oil production with other countries expected to join.
Opec announced that Equatorial Guinea, which had been a non-Opec party to the deal, will join Opec and continue to restrain its output - though its contribution to the cuts is only a tiny 12,000 bpd, out of a total 1.758m bpd.
Mr Al Falih said that Egypt and Turkmenistan could not joint this round but hope to join the non-Opec group at a future date.
amcauley@thenational.ae
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