OPEC Admits That Cutback Extension is Required, but Market Expresses Non-Faith in the Cartel

Tuesday March 21, 2017

In the clearest admission yet that the Organization of the Petroleum Exporting Countries' (OPEC) production cutback initiative isn't working, no less than six OPEC sources told Reuters that the cartel needs to extend its 1.2 million barrel per day (bpd) reductions beyond the June deadline - and perhaps make even deeper cuts in order to positively impact the global oil glut.

One OPEC delegate said, "An extension is needed to balance the market," but added that "any extension of the cut agreement should be with non-OPEC" - meaning, Russia and other non-members need to remain part of the initiative.

Five other sources said it was "increasingly clear" that the market needs more than six months to stabilize, and they also stated it was crucial that non-OPEC members stay on a cutback course; one said, "The ministers will meet in May to decide, but everyone has to be on board."

One source theorized that Saudi Arabia will push to get support from non-members because the kingdom is "not happy with the return of shale oil in full force and [has] to make a hard choice between losing part of [its] market share or steady income."

Khalid Al-Falih, energy minister for the Saudis, said last week that his kingdom will extend the cuts into the second half of 2017 if supplies stay above the five-year average, but if market activity is any indication, there's little faith in OPEC being able to achieve any kind of success despite its best efforts: the U.S. Commodity Futures Trading Commission says hedge funds decreased their net-long position during the week ended March 14 by 23 percent to 288,774, the largest decline on record and the lowest level since December.

The Commission also noted that as WTI slipped below $50 last week, producers and merchants increased their short positions to 739,736 futures and options, the highest level in a month.

Brent Belote, founder of Cayler Capital LLC, remarked, "If you make it through this next OPEC compliance meeting and we don't have further jawboning by the Saudis and Russia, or more compliance, I think that you have room to grow on the short side, which is worrisome."

Fatih Birol, executive director at International Energy Agency, told Bloomberg that while he sees increased demand from India and China for crude in the near future, another trend is the recovery of  the U.S. shale industry, which he describes as "a strong comeback."

Birol noted that "we will see a major boom of a second wave of U.S. shale production" this year and OPEC in considering extending its reduction initiative needs to take this into consideration: because if an extension results in higher prices, this will merely cause the Americans to pump even more.

The IEA last week stated that the global glut is proving to be a lot tougher to clear than initially thought, with stockpiles across developed nations increasing in January for the first time in six months after OPEC nations relentlessly raised production while finalizing its agreement to cut output.