OPEC Panel Recommends Cutback Extension as Latest Data Indicates Cartel Has Failed to Reduce Stockpiles

As an Organization of the Petroleum Exporting Countries (OPEC) committee on Friday recommended a six month extension to their production cutback initiatives, data that comes as no surprise to analysts following fundamentals shows that the first six months of reductions have led to increased, not decreased, global stockpiles.

That's because, according to Citigroup Inc., OPEC agreed in principle to reduce production last September but allowed members to pump all-out until the deal took effect at the beginning of January - and the cartel not only had to work to reduce this surplus but also contend with rising U.S. shale production that resulted from the higher oil prices the members' efforts were generating.

Bloomberg calculates that when OPEC's accord expires in June, "stockpiles will be roughly back in line with their end-December level and still about 200 million barrels above the five-year average" - which would leave the group well short of its goal of eliminating an inventory surplus of about 300 million barrels over the five year average.

Eugen Weinberg, head of commodities research at Commerzbank, remarked, “OPEC is like a magician waving his hands and trying to pull the rabbit out the hat, but still the rabbit isn’t there; they’ve done all they can with the production cuts and the effect is close to non-existent.”

Citigroup was more succinct, saying OPEC had been "hoisted by its own petard."

These findings fly directly in the face of comments made Friday by Alexander Novak, energy minister for Russia: he said "The situation has gradually been improving since the beginning of March; the oil surplus has been reduced.

"The situation is getting more and more stable and there's less volatility on the market."

Meanwhile, during an OPEC and non-OPEC technical committee meeting in Vienna on Friday, it was recommended that the cutbacks continue to the end of this year, according to sources; but the news was not enough to spark market interest, with Brent trading below $52 based on concerns that U.S. shale and his inventories would continue to stymie the cartel's efforts.

For the record, Khalid al-Falih, energy minister for Saudi Arabia and the cutback initiative's de facto leader, told media that "There is consensus building but it's not done yet."

And even though Russia's Novak believes all is well with the market, Essam al-Marzouq, oil minister for Kuwait, emerged from Friday's meeting to tell reporters that "Russia is on board preliminarily ... Compliance from Russia is very good."

But even though OPEC's knack for self-sabotage was clearly outlined by Bloomberg, indications have arisen that exactly the same thing will happen again if the cutbacks are extended, with Iraq reportedly holding out against more cutbacks in order to fight ISIS, and talk that Baghdad may ask for an exemption.

For his part, Mohammad Sanusi Barkindo, secretary general for OPEC, told CNBC "We are giving the implementation process the top priority that it deserves because our credibility is at stake… I can tell you that we are very committed to complying fully with the voluntary decisions that we took and so far so good."

Anas Al Hajii, an independent oil analyst and economist, told Bloomberg that OPEC has no other choice but to maintain the cuts: "Not to increase prices, but now to prevent prices from declining."

Bill Baruch, chief market strategist at IITrader, recently told Bloomberg that extension deal or not, a technical breakdown in the oil market is taking place and that oil will soon trade in the $40s.