Crude Prices Fall 4% and US Claims Victory as OPEC Extends its Oil Cuts By 9 Months

The Saudis insist that the same level of cuts will bring us within the five year average by year's end.

After weeks of intense speculation and experts claiming deeper cuts would have to accompany a crude reduction extension, the Organization of the Petroleum Exporting Countries (OPEC) on Thursday finally agreed to extend their troubled reduction initiative by another nine month to March of 2018, but it held fast to the same 1.8 million barrel per day (bpd) supply cut - and the market responded with oil prices plummeting 4 percent.

Khalid Al-Falih, energy and industry oil minister for Saudi Arabia, stated in a press conference shortly after the announcement, said, ""We considered various scenarios, from six (months) to nine to 12 and we even considered options for a higher cut... All indications are solid that a nine month extension is the optimum and should bring us within the five-year average by the end of the year."

Konstantinos Venetis, senior economist at TS Lombard, told CNBC that the remainder of 2017 might be a "sweet spot" for crude but "things get more complicated beyond the near term: OPEC's action should best be viewed as a defensive supply 'taper' in the hope of better demand."

Traders, well aware that global demand growth is problematic, too many nations are pumping full out regardless, and only more vigorous pumping restrictions on OPEC's part could begin to resolve the problem, caused West Texas Intermediate to plunge $2.46 to $48.90 and Brent to tumble $2.52 to $51.44 per barrel.

But despite the need for deeper cuts, analysts conceded that enacting them would have likely strained the all-important compliance with the OPEC initiative to the breaking point and encourage non-OPEC producers to pump even more, according to Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions.

He added, "Compounded by seasonal demand growth, the cuts should help accelerate global inventory drawdowns over the balance of the year and will likely set a new floor for crude oil prices in the low $50 per barrel range."

A contrary view is held by Wood Mackenzie, which pointed out that more of the same cutbacks will result in the U.S. raising its production by 950,000 bpd, thus continuing to thwart the cartel's attempt to achieve a sustained supply and demand rebalance.

Unsurprisingly, the U.S. views OPEC's Thursday decision as a victory for shale: "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," said Ryan Sitton, commissioner of the Texas Railroad Commission.

He added, "The days of OPEC using oil supplies and prices as a political weapon are gone."

Meanwhile, purely in terms of the extension getting inventories down to the five-year average, OPEC needs to force a drop of about 300 million barrels, according to Tamar Essner, director of energy and utilities at Nasdaq Corporate Solutions; achieving that means OPEC will not just have to pump less, but also curtail exports that are filling storage facilities globally - and this is something that has lagged under the cutbacks to date.

Jacques Rousseau, managing director at Clearview Energy Partners, said, "The important thing to consider here is that the world uses about 2 million bpd more oil in the second half of the year than the first half of the year, so if you're ever going to impact supply-demand, the second half of the year is the time to do that."

In what may be regarded as an unsettling preview of the future, earlier this week John Kemp, senior market analyst, commodities and energy for Reuters, wrote that "there is no prima facie evidence that OPEC and non-OPEC production cuts changed the previous trend in prices."