Nine Month OPEC Extension At Same Cutback Rate Means Bearish Future For Oil: Analysts

Thursday May 18, 2017

Extending the Organization of the Petroleum Exporting Countries' (OPEC) crude production cutbacks to 9 months may be unprecedented as far as the cartel's record for making commitments goes, but not deepening the cuts will still result in a bearish market, according to Bill Baruch, chief market strategist at iiTrader.

Speaking to Bloomberg television, Baruch said he believed the market will stay between $49-$50 heading into the May 25 meeting with OPEC members, "and I actually think this could be a little bit bearish in the long term because they're locking in this for nine more months and not deepening the cuts at all."

Plus, only extending the cuts further than 6 months will cause the U.S. to overtake their cutback rate, thus swelling stockpiles and further reducing prices, he added.

A similarly-minded International Energy Agency warned this week that if OPEC extends its cuts to the end of this year and maintains its April production level, stockpiles will fall by 700,000 barrels per day (bpd) - but "Even if this turns out to be the case, stocks at the end of 2017 might not have fallen to the five-year average, suggesting that much work remains to be done in the second half of 2017 to drain them further."

The IEA went on to raise its forecast for U.S. and non-OPEC supply growth in 2017 by 100,000 bpd and 110,000 bpd respectively, and added that "Such is the diversity and dynamism of the U.S. shale sector that our numbers are likely to be a moving target as 2017 progresses."

Moreover, the agency said nations such as Libya and Nigeria warrant scrutiny, because their production has risen and "any significant increase clearly offsets cutbacks by other OPEC and non-OPEC countries."

But Bloomberg calculations paint a different picture: using U.S. government data, the news agency suggests that if the OPEC cuts continue to the first quarter of 2018, "it will pare near-record inventories in developed nations by 8 percent and erase the glut weighing on the market, with stocks falling to about 10 million barrels below the five-year average next March."

However, Bloomberg stated, "Fulfilling the plan, which started in January, would require OPEC to comply with output targets for 15 months, longer than the group has typically managed in the past."

Ed Morse, global head of commodities research at Citigroup, is another expert looking forward to the positive effect of a 9 month cutback extension and presumed the cartel may even deepen the cuts by 300,000-500,000 bpd; he told Bloomberg that as a result crude will rise to the mid $60s by the end of the year.

As next week's meeting between OPEC members draw nearer, the issue of OPEC's cutback efficacy has increasingly become focused purely on possible price outcomes, and in this regard the majority of experts seem to believe prices will remain rangebound due to questionable demand growth and enormous global stockpiles, case in point: earlier this week Wang Yilin, chairman of China National Petroleum Corp. remarked that "I don't think it's realistic for the oil price to hike significantly and continuously in the short term....we estimate that in 2017, the price per barrel will be around $50....but $60 is not sustainable."