Monday Crude Losses and Output Surges Underscores FGE Head Calling for OPEC Cutback Extension - to the End of 2018

Analysts say U.S. output surge alone threatens to cause further market losses.

Fereidun Fesharaki, founder and chairman of FGE, joined the ranks of experts who believe that the Organization of the Petroleum Exporting Countries (OPEC) is certain to extend its crude cutback initiative to the end of this year; however, contrary to the upbeat rhetoric issued by the cartel during the first six months of its cutbacks, he says market conditions are such that members and non-members will have to keep limiting production until as late as the end of 2018.

Fesharaki's message was delivered amid news that oil on Monday closed at its lowest in over a month due to a surge in Libyan output, more rigs online in the U.S., and Saudi Arabia cutting prices to its Asian customers.

West Texas Intermediate dropped 49 cents to $48.84, the lowest close since March 28 and 37 percent below the 100 day average, while Brent dropped 53 cents to $51.52.

The losses came in the wake of the National Oil Corp. revealing that Libya's crude production exceeded 700,000 barrels per day (bpd), the highest rate since December 2014, and Baker Hughes data showing that American drillers increased the number of active oil rigs to 697, the highest level in two years last week; meanwhile, Saudi Arabian Oil Co. lowered its pricing for Arab Light crude to Asia by 40 cents to an 85 cent discount to the regional benchmark.

The Saudis' move will allow the kingdom to boost volumes while still following the OPEC cutbacks.

Giovanni Staunovo, commodities analyst for UBS Group AG, remarked, "The return of Libyan supply makes the job of OPEC more challenging," and Fesharaki, speaking at the Middle East Petroleum and Gas Conference in Dubai, said an increase in U.S., stockpiles alone could cause oil to drop to as low as $40 per barrel.

Harold Hamm, chief executive officer of Continental Resources Inc., pointed out that U.S. output is expected to expand this year by at least 400,000 bpd and that the market needs more time to start using up stored inventories.

While Fesharaki said "The probability that OPEC will agree to extend its cuts is at 100 percent," he quickly followed this by adding, "And the cuts will have to be extended even beyond this year, to the middle or even to the end of next year."

Unfortunately, nothing has been mentioned about an extension greater than six months, and even this will presumably be debated when OPEC members congregate in Vienna to discuss the issue on May 25.

Observers have been vocal in their forecast of what will happen if the cartel doesn't agree to continue cutting back, with Gene Marcial, manager of market research at Tradition Energy, uttering a familiar warning that "I think you could basically target the low to mid $30s."