Oil prices rise as market awaits extended output cut

Business Wednesday 24/May/2017 16:53 PM
By: Times News Service
Oil prices rise as market awaits extended output cut

London: Oil prices rose on Wednesday, supported by growing confidence that Opec and other big producers would agree to keep output restricted for the rest of 2017 and into the first quarter of next year.
Benchmark Brent crude oil was up 40 cents a barrel at $54.55 by 0810 GMT. US light crude oil was 35 cents higher at $51.82.
Both crude benchmarks have gained more than 10 per cent from their May lows below $50 a barrel, rebounding on a consensus that the Organisation of the Petroleum Exporting Countries and other producers will maintain strict limits on oil production in an attempt to drain a global oversupply.
Opec has promised to cut supplies by 1.8 million barrels per day (bpd) until the end of June and is expected on Thursday to decide to prolong that cut to March 2018.
"With oil stocks nowhere near Opec’s self-assigned objective of the recent five-year average level, an extension of cuts seems all but a forgone conclusion," said Harry Tchilinguirian, strategist at BNP Paribas.
Sushant Gupta, research director at Wood Mackenzie, told Reuters Global Markets Forum that output cuts were likely to be extended until the first quarter of 2018, and that adherence by Opec members to the output cuts would probably remain high.
"If the cuts are rolled over until the first quarter of 2018, we expect oil prices to be around $57 a barrel for 2018," Gupta said. BMI Research said the Opec-led cuts would only result in a balanced market this year, but that from 2018 onward markets would return to oversupply, albeit at a lower level than 2013-2016.
"Over a five-plus-year horizon, oil price growth is in a structural slowdown, pressured by persistent supply gains," BMI Research said in a note to clients.
One reason why markets have not tightened more has been US oil production, which has soared by 10 per cent since mid-2016 to 9.3 million bpd.
Benefiting from a market known as contango, in which future oil prices are higher than those for immediate delivery, US drillers have sold future production in order to finance expanding output.
To stop this, analysts at Goldman Sachs have suggested the oil futures price curve should be pushed into backwardation, where forward prices are below current ones.
But while backwardation might be able to reduce inventories, it is less clear how Opec could alter the forward price curve, or if that would stop production rising.