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OPEC Agrees to Cut Production, Market Skeptical of Supply Glut Diminishing


Oil drifted lower, trading below US$50 a barrel and extending last week's drop after OPEC underwhelmed investors with its production-cut extension deal.

Brent crude futures were trading 5 cents higher at $52.20 per barrel at 1311 GMT.

Amrita Sen, co-founder and chief oil analyst at Energy Aspects, told Reuters that "OPEC oversold the meeting to the market way too early" - referring to hints prior to OPEC's May 25 meeting that the cartel might also deepen supply cuts, extend them by as long as 12 months, curtail exports, and tell the market how exactly it would terminate supply curbs in 2018 - all of which raised market expectation much higher.

US West Texas Intermediate (WTI) crude futures remained below US$50, down eight cents at US$49.72.

Despite the agreement on Thursday, oil price suffered a major selloff on that day and was down around 3 percent by the end of the day. The coalition of 24 countries making the deal will also likely have difficulty curbing the effect of shale oil production out of the USA and other non-OPEC countries not agreeing to production cuts.

An initial agreement, in place since January, would have expired in June 2017.


The move kept global oil stockpiles near record highs, forcing OPEC first to suggest extending cuts by six months, but later proposing to prolong them by nine months and Russian Federation offering an unusually long duration of 12 months.

Much of OPEC's success will depend on output in the United States C-OUT-T-EIA, which is not participating in the cuts and where production has soared 10 percent since mid-2016 to over 9.3 million bpd, close to top producer levels Russian Federation and Saudi Arabia. "We now have three weeks of combined inventories draw in crude, distillates, and gasoline so fundamentals speak of faster rebalancing in the market", Both Bryan Goh and Wood Mackenzie believes that the price of oil will revamp on the latter part of the year.

"Next year, we actually think United States of America oil production won't increase as much because they've increased so much this year", Yergin said. And, the recent USA output increase has been onshore, from shale oil fields.

"It's huge inventories around the globe that are really keeping a lid on prices, combined with the ability of those agile United States producers who scramble back into action should the oil price rise", Michael McCarthy, chief market strategist at CMC Markets in Sydney, said by phone.

Even if the rig count did not increase further, Goldman Sachs said it estimates that USA oil production "would increase by 785,000 bpd between 4Q16 and 4Q17 across the Permian, Eagle Ford, Bakken and Niobrara shale plays".

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