Opec won't allow oil glut to slip out of hand as it extends output cuts by 9 months

The Opec decided on Thursday to extend cuts in oil output by nine months to March 2018 as the producer group battles a global glut of crude after seeing prices halve and revenues drop sharply in the past three years.

The extended reductions are likely to be carried out once again in tandem with a dozen non-members led by top oil producer Russia, which reduced output with the Organisation of the Petroleum Exporting Countries from January.

The Opec's cuts have helped to push oil back above $50 a barrel this year, giving a fiscal boost to producers, many of which rely heavily on energy revenues and have had to burn through foreign-currency reserves to plug holes in their budgets.

Oil's earlier price decline, which started in 2014, forced Russia and Saudi Arabia to tighten their belts and led to unrest in some producing countries including Venezuela and Nigeria.

The price rise this year has spurred growth in the US shale industry, which is not participating in the output deal, thus slowing the market's rebalancing with global crude stocks still near record highs.

The nine-month extension of the cuts - from output levels in October 2016 - was largely expected by the market.

By 1430GMT, Brent crude was 0.7 per cent down at around $53.50 per barrel, having pared earlier losses after the Opec said it would not deepen the cuts or extend them by as long as 12 months.

In December, the Opec agreed its first production cuts in a decade and the first joint cuts with non-Opec producer nations, led by Russia, in 15 years. The two sides decided to remove about 1.8 million barrels per day from the market in the first half of 2017 - equal to two percent of global production.

On Thursday, the Opec agreed to keep its own cuts of around 1.2 million bpd in place for nine months, Kuwaiti oil minister Essam Al Marzouq said.

Nigeria and Libya will remain exempt from making cuts and Iran, which was allowed to increase production under the original accord, retains the same output target, he said after the meeting.

Opec oil ministers were continuing their discussions with non-Opec producers. Opec delegates said the proposal for joint cuts was also around 1.8 million bpd, which would see non-Opec producers cut under 600,000 bpd. Despite the output cut, the Opec kept exports fairly stable in the first half of 2017 as its members sold oil from stocks.

The move kept global oil stockpiles near record highs, forcing the Opec first to suggest extending cuts by six months, but later proposing to prolong them by nine months, and Russia offering an unusually long duration of 12 months.

"There have been suggestions [of deeper cuts], many member countries have indicated flexibility but ... that won't be necessary," Saudi Energy Minister Khalid Al Falih said before the meeting.

Nigeria, Libya excluded

The Opec produces a third of the world's oil. Its production reduction of 1.2 million bpd were made based on October 2016 output of around 31 million bpd, excluding Nigeria and Libya.

Al Falih also said Saudi oil exports were set to decline steeply from June, thus helping to speed up market rebalancing. Opec sources have said the Thursday meeting will highlight a need for long-term cooperation with non-Opec producers. The group could also send a message to the market that it will seek to curtail its oil exports. "Russia has an upcoming election and Saudis have the Aramco share listing next year so they will indeed do whatever it takes to support oil prices," said Gary Ross, head of global oil at Pira Energy, a unit of S&P Global Platts.

The Opec has a self-imposed goal of bringing stocks down from a record high of three billion barrels to their five-year average of 2.7 billion. "We have seen a substantial drawdown in inventories that will be accelerated," Falih said. "Then, the fourth quarter will get us to where we want."

The Opec also faces the dilemma of not pushing oil prices too high because doing so would further spur shale production in the United States, the world's top oil consumer, which now rivals Saudi Arabia and Russia as the world's biggest producer. "Less Opec oil on the market enhances the opportunity for American energy to fill needs around the world, and will help us achieve energy dominance," Ryan Sitton from the Texas Railroad Commission, told Reuters.

Source: Khaleej Times