OPEC, non-OPEC producers extend production-target agreement for 9 months

The Organization of Petroleum Exporting Countries and a group of non-OPEC countries, including Russia, agreed to extend existing production targets to Apr. 1, 2018, in efforts to reduce world oil inventories and stabilize oil prices.

The Organization of Petroleum Exporting Countries and a group of non-OPEC countries, including Russia, agreed to extend existing production targets to Apr. 1, 2018, in efforts to reduce world oil inventories and stabilize oil prices.

In November 2016, OPEC agreed to its first production cuts in a decade. The initial production-cut agreement also marked the first time in 15 years that non-OPEC producers signed onto a joint agreement with OPEC.

Despite production-cut targets of 1.8 million b/d effective since January, oil inventories have fallen slower than expected. Saudi Arabia and Russia both recently advocated a 9-month extension.

“There have been suggestions (of deeper cuts), many member countries have indicated flexibility but…that won’t be necessary,” said Saudi Energy Minister and OPEC Pres. Khalid al-Falih. He did not rule out the possibility of another extension of the production targets.

Al-Falih said OPEC members Nigeria and Libya still are excluded from the production targets.

He told reporters in Vienna that Saudi oil exports were set to decline to help accelerate market rebalancing.

“Rebalancing has been partially achieved,” al-Falih said during a May 25 news conference with Russia Energy Minister Alexander Novak. He said efforts toward sustained market stability “deepen institutionalization of cooperation between OPEC and non-OPC countries.”

Novak said the latest statistics show 102% compliance by OPEC and non-OPC producers with the initial agreement announced last year. He said the 9-month extension signals “a new era” of bilateral cooperation.

A joint meeting of a monitoring committee on the production-cut targets is scheduled in 2 months in Russia.

Analysts comment

“The bottom line is that Saudi has managed to get a consensus ahead of the meeting for this meeting to take place in a non-confrontational way,” Harry Tchilinguirian, oil strategist at French bank BNP Paribas told the Wall Street Journal. “We’ve never had this consensus going into this OPEC meeting for a long time.”

Tchilinguirian expects oil prices will go above $60/bbl this year, noting he did not change his forecast after the the announcement.

Wood Mackenzie Ltd. also left its forecast intact that calls for Brent crude oil prices will average $55/bbl this year.

Ann-Louise Hittle, WoodMac’s vice-president for research macro oils, said, “OPEC’s decision is a big one because it shows a commitment to support oil prices into 2018 and potentially for all of next year.”

She expects a “firmer oil price will…further support the US tight oil industry into 2018,” which help US onshore drillers make plans.

“The extension through to the first quarter of 2018 makes it clear to the oil market that OPEC intends to continue to support oil prices at the expense of market share, at for the time being,” Hittle said, adding that she expects to see market fundamentals tighten in this year’s second half.

Andrew Slaughter, executive director for the Deloitte Center for Energy Solutions, said the 9-month extension was warranted over a 6-month extension to maintain a stronger oil-price environment and to draw down oil inventories worldwide.

“Inventory drawdowns could become visible as early as August or September, although it could take until the first quarter of next year to return to a more normal historical range,” Slaughter said. “Deeper cuts would have likely weakened the incentive for high compliance across OPEC while encouraging non-OPEC producers to accelerate production growth.”

He expects US production increases will not offset OPEC cuts despite rig count growth.

“The number of drilled and uncompleted wells has also increased by about 500 in recent months, which represents an economic opportunity for US producers to maintain or grow production with better economics than with full-cycle costs,” Slaughter said.

Contact Paula Dittrick at paulad@ogjonline.com.

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