Oil rises to month-high with output cut extension expected

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24 May, 2017

The U.S. has more leeway to release the SPR crude as its own production C-OUT-T-EIA has surged 49 percent over the past five years.

By extending cuts into 2018 and promising to boost output next year, OPEC could force the oil market into backwardation that would scare away private equity and other investors who have been funding the American shale producers.

At the moment, OPEC's implementation of the oil production curtailment stands at over 100 percent, while non-cartel countries have reached an adherence of over 95 percent, according to Algerian Energy Minister Noureddine Boutarfa.

They are "fully aware that their efforts so far have broadly failed and that either the group abandons active supply management entirely, or it becomes more serious".

But such talk could lead to disappointment if not approved, Commerzbank analysts said.

West Texas Intermediate for July delivery slid as much as 48 cents to $50.65 a barrel on the New York Mercantile Exchange and was at $50.73 a barrel at 8:08 a.m.in London. The June contract expired Monday after advancing 0.8 percent to $50.73.

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WTI futures for July delivery, the new US pricing benchmark, were marked 0.1% lower from their Monday close at $50.60 while Brent crude contracts for the same month were seen 0.05% lower at $53.38 per barrel. There is near-unanimity among watchers that the deal will be extended, with the only real questions being for how long and whether cuts are more severe.

OPEC is nearing the end of a six-month agreement to cut its collective production (along with 11 other non-member petrostates) to try and cut away at the global glut of crude and kick off a price rebound, but not all of its members are adhering to the plan. usa crude production has climbed 10 percent since mid-2016 to 9.3 million barrels per day, close to levels from top producers Russian Federation and Saudi Arabia. For this to happen, demand must grow and stockpiles must be "drained further".

The risk of a long extension to the cuts is that it could further encourage USA shale output, said Capital Economics. While stubbornly high global inventories have taken longer-than-expected to drain, signs that US supplies are starting to ease is adding to optimism. "We want to source our crude oil from a competitive market, from every part of the world", he said, adding that India was expanding its use of renewable energy, such as solar and wind, and encouraging electric vehicles.

OPEC, Pradhan said, should treat Asian markets as primary markets.

PVM said if US imports in coming years matched those of 2016, the country would need to keep 489 million barrels of oil in the SPR, some 140-150 million barrels above the proposed new level.

At the same time, commodities brokerage Marex Spectron said "spot demand (for oil) remains strong, and we expect it to get even stronger (in coming weeks)".


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