Yet More OPEC Cutback Extension Rumours Sends Crude Prices to 4-Month High

There have been more arguments that an extension alone will not alleviate the global glut. File Image / Pixabay

Expectation that the Organization of the Petroleum Exporting Countries (OPEC) will extend its output reduction initiative beyond its March 2018 expiry date, along with U.S. president Donald Trump getting tough with Iran in a United Nations address this week, caused crude on Wednesday to finish at a four month high.

West Texas Intermediate rose 93 cents to settle at $50.41 per barrel, and Brent climbed $1.15 to $56.29 per barrel - the highest climb since March.

The gains came despite Energy Information Administration data released Wednesday showing that U.S. crude supplies climbed by 4.6 million barrels for the week ended September 15, far above a recent S&P Global Platts forecast for a 2.4 million barrel rise.

Traders are reportedly fixated on OPEC as the cartel and non-members prepare to meet in Vienna Friday to review compliance with the agreement; some members, including Iraq, have indicated they are open to extending the production cuts after the deal expires next year.

As for Trump's influence, Colin Cieszynski, chief market strategist at CMC Markets, said, "There's been a lot of chatter about Trump and Iran with their president tweeting back at Trump today; this could be firing up Middle East tensions."

He is referring to the brash billionaire at the United Nations once again vowing to tear apart the agreement that lifted sanctions against the Islamic Republic.

It's difficult to understand why traders have been so inspired of late to boost prices based on rumours but no concrete vows swirling among OPEC members: for example, while Jabbar al-Luaibi, oil minister for Iraq, was reported on Wednesday to be among a group that think the cuts should be increased by 1 percent, he was also quoted as saying with regards to an output extension, "It is premature to come to a conclusion or decision seven months before March."

Moreover, even if this week's OPEC meeting ends on a high note and supports the argument that their cuts have been effective, any revival in prices will be short lived thanks to the unstoppable U.S. shale industry, which rebounded from Hurricane Harvey far quicker than anyone had predicted.

That's the contention of Bloomberg, which again pointed to International Energy Agency data showing that if OPEC continues to produce at current rates - about 32.7 million barrels per day (bpd) - global inventories will accumulate rather than diminish next year, by about 300,000 bdp.

And even if deeper cuts were enacted, Mike Wittner, head of oil markets research at Societe Generale SA, said this would just encourage even more shale output.

Whatever transpires, one thing that won't happen is a significant change in prices, said Christian Nolting, global chief investment officer at Deutsche Bank Wealth Management, who told Bloomberg television, "I think we have a lot of supply on the oil side, and even if we see it coming down a bit...the effectiveness....and that's why we don't expect oil prices to go massively up."

Conversely, due to demand, Nolting says prices won't fall dramatically either: "So I think it's quite stable in the oil sector."

Last week, Julian Lee, oil strategist for Bloomberg, argued that OPEC would be far better off focusing on controlling exports rather than production if it truly wants to bring about a market rebalance.