Oil price drops 5% on OPEC decision

The nine-month extension of the cuts - from output levels in October 2016 - was largely expected by the market. PREMIUM TIMES' Oladeinde Olawoyin examines the issues.

One OPEC delegate at the meeting in Vienna said the group of 14 oil producers had agreed to extend cuts in production by nine months to March 2018.

OPEC has for weeks been laying the groundwork to extend production cuts.

The group initially proposed extending cuts for an additional six months, but later made a decision to prolong for nine, as crude oil inventories remain stubbornly high.

The problem for OPEC is that while crude sits substantially below the highs around $100 a barrel reached in 2014, it is high enough to bring back into the market USA producers who eased back as prices tumbled previous year.

The combined cap on oil output for Opec and non-members was agreed at around 1.8 million barrels per day.

The pact, a dramatic policy turnaround for OPEC that even had regional arch rivals Saudi Arabia and Iran see eye to eye, had been due to expire on June 30.

The Nigerian oil-rich Niger Delta region had been rocked by agitations by militants who attacked oil installations, sabotaging efforts to raise output. Oil traders are no longer worrying "Will OPEC cut production?", but are now asking "Will cuts matter?".

Tamar Essner, director of energy and utilities at Nasdaq Corporate Solutions, said that the countries that had agreed to the cut had complied by easing production but continued to export at high levels from existing inventories.

Thursday's meeting also saw Equatorial Guinea lined up to become the latest Opec member.

This could increase supplies and push down prices.

But as the cartel meets Thursday, analysts said the market needs more than an extension, raising concerns over compliance among member states and uncertainties in prices.

While an HIS Markit research note sees OPEC revenues showing a modest gain this year after dropping from their peak of $1.2 trillion in 2012, "the total will be less than half the level of 2012, when prices were more than double current levels".

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For the most part, the news matched analysts' predictions, although word of both shorter and longer extension cuts and variations on how much to cut were in play. "There has never been a more important time to stand together and it is our honour to stand with OPEC as a positive force in global energy".

How shale producers respond in coming months will have as much of an effect on pricing as OPEC's cuts, he said.

Six months after forming an unprecedented coalition of 24 nations and delivering output reductions that exceeded all expectations, resurgent production from USA shale fields has meant oil inventories remain well above the level targeted by OPEC ministers.

"Conversely, if OPEC hikes output, oil prices could collapse to $35/bbl, setting the cartel on an even more hard fiscal path". "For 2017, the OPEC decision today does not make a large difference to our oil price forecast".

Commerzbank cited data from the U.S. Department of Energy saying U.S. production was roughly 540,000 barrels per day higher in mid-May than at the start of the year.

This proved to be a key factor in the West African country securing exemption from OPEC's landmark 2016 deal to curb a global supply overhang.

Major oil producers have struck a deal.

"The indications that I have so far is that there is a willingness to extending that", Mr. Kachikwu said.

"The fact that we have not elaborated on a specific strategy for the second quarter, the second half of 2018, should not be interpreted as that we don't have a strategy", he said.

Many have returned to the market since crude prices have risen from last year's lows to over 50 USA dollars a barrel, and more are set to resume operations if crude prices go even higher.

"Shale is an important variable but we don't believe it is going to significantly derail or affect what we are doing", he said.

"It all comes together in the inventories, which have been stubbornly high in the last 18 months as a result of three years of accelerated investment in the upstream and a much higher growth in supply capacity than growth in demand", Andrew Slaughter, executive director for Deloitte's Center for Energy Solutions, told Hart Energy.

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