Oil Gains on Possible Extension to Production Cuts

Feb 18, 2017, 00:34
Oil Gains on Possible Extension to Production Cuts

Futures slid 1.7% in NY, the biggest drop in more than three weeks.

As OPEC leaders defend their role as a market stabilizer, US shale oil producers are starting to return to work after idling operations during last year's market downturn.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russian Federation, agreed to cut output nearly 1.8 million barrels per day (bpd) during the first half of 2017. USA light crude gained 10c to $53.21.

Early in the session, prices were pressured by increasing U.S. production as investors continued to react to Wednesday's bearish weekly U.S. Energy Information Administration's inventory report.

Traders said that until more clarity on a potential extension of production cuts was achieved, oil prices would be capped.

Novak said Russian production was now down by more than 100,000 barrels per day and should be 150,000 barrels per day lower in March. U.S. West Texas Intermediate (WTI) crude futures were down 30 cents, or 0.6 percent, at $53.06 per barrel.

Seasonally lower global demand in March and April may help both OPEC and non-OPEC producers with compliance in February and March, but further on, with summer approaching and demand rising, more producers will be tempted to cheat, some analysts reckon.

Iraq pledged to decrease production by 210,000 barrels a day from the 3.91 million it pumped in October, the month that OPEC set as a baseline for its agreement. Saudi Arabia reduced output by 717,600 barrels a day last month.

"Oil demand may peak sooner than expected if GDP growth is slower than past trends, fuel efficiency rises more sharply, climate policies become more stringent, or alternative-fuel vehicles take off more quickly", Bordoff said. Even if all those reductions are made, total supply from outside OPEC will increase by 400,000 barrels a day this year. Now the cartel's de facto leader and largest producer is going the extra mile in reducing output, at least in January.

Gavin Wendt, founding director and senior resource analyst at commodity research firm MineLife, agreed: "The world oil market is very much in wait-and-see mode, which is why the price has remained in the mid-US$50s per barrel range since mid-December".

The EIA reported that refineries processed 15.5 million barrels of crude last week, down from the previous week's 15.9 million bpd. That pushed inventories of the fuel to a record at 259 million barrels.

In other news, the surprisingly high level of adherence to OPEC's plan has kept the hedge funds actively involved on the long side of the market.

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