London: The Organization of Petroleum Exporting Countries (Opec) extended oil production cuts for nine more months after last year’s landmark agreement failed to eliminate the global oversupply or achieve a sustained price recovery, according to sources.
Members meeting in Vienna agreed to prolong their accord through March, said delegates familiar with the decision, asking not to be identified before an announcement is made. Opec is not including an option to add three more months beyond that, as had been mooted, according to a delegate.
Six months after forming an unprecedented coalition of 24 nations and delivering output reductions that exceeded expectations, resurgent production from US shale fields has meant oil inventories remain well above target. While supplies are shrinking, ministers acknowledged that the surplus built up during three years of overproduction won’t clear until at least the end of 2017.
“The market seems to be a bit disappointed as there is no ‘something extra’ the markets waited for," said Jan Edelmann, a commodity analyst at HSH Nordbank AG. “It seems as though Opec fears letting the stock-draw run too hot."
Benchmark Brent crude traded at $53.40 a barrel as of 1.21pm in London, down 1%, after earlier sliding 2.3%.
Opec has submitted its extension proposal to its non-member partners before talks on their continuing participation take place later on Thursday, according to one delegate. Eleven non-members including Russia joined the original deal in December, bringing total supply-reduction pledges to about 1.8 million barrels a day.
The curbs were intended to last six months from January, but confidence in the deal, which boosted prices as much as 20%, waned as inventories remained stubbornly high and US output surged.
Saudi Arabian oil minister Khalid Al-Falih insisted on Thursday that the cuts are working, saying stockpile reductions will accelerate in the third quarter and inventory levels will come down to the five-year average in the first quarter of next year. While he expects a “healthy return" for US shale, that won’t derail Opec’s goals and a nine-month extension will “do the trick", he said.
The extension prolongs a rare period of collaboration between Opec and some of its largest rivals, including Russia. The last time both sides worked together was 15 years ago, and the agreement fell apart soon after it began. The current Opec/non-Opec accord encompasses countries that pump roughly 60% of the world’s oil, but excludes major producers such as the US, China, Canada, Norway and Brazil.
Opec members Libya and Nigeria will remain exempt from the output curbs as they restore lost production, according to Al-Falih. Iran will also keep the same conditions as in last year’s agreement, one delegate said. That deal gave the Iran room to increase output to a maximum of 3.797 million barrels a day.
Without a steer on what will happen beyond March, there’s concern that Opec could return to the free-for-all production that caused prices to slump from 2014 to 2016, though Al-Falih has insisted the organization will maintain control.
“We have said we will do whatever it takes," the minister said.
Al-Falih later announced that Opec is welcoming a new member, Equatorial Guinea, to its ranks. The African nation will be one of the group’s smallest producers, pumping about 270,000 barrels a day, a little more than neighboring Gabon. Bloomberg