Crude Prices Dip Despite "Almost Certain" Oil Cuts Extension

One analyst warns that further market disappointments may occur later this week.

With the Organization of the Petroleum Exporting Countries' (OPEC) formal meeting in Vienna less than a day away, the cartel's Joint Ministerial Monitoring Committee have agreed to support a nine month extension of crude production cutbacks through March 2018.

However, although the prospect of extended cuts has caused crude prices to climb over the past week, it apparently wasn't enough to counter bad news from the Energy Information Administration that U.S. gasoline stocks fell by only 787,000 barrels in the week ended May 19, compared with expectations for a 1.2 million barrel draw: West Texas Intermediate on Wednesday settled down 11 cents at $51.36, while Brent dropped 22 cents to $53.93 per barrel.

Amrita Sen, chief oil market analyst at Energy Aspects Ltd., also warned that further market disappointments may be forthcoming: "A nine-month extension is effectively a done deal, but because Russia and Saudi Arabia announced their support for it earlier in the month, the market may be disappointed if Thursday's meeting ends with 'just' a nine-month extension, and prices may sell off."

Even worse prospects - this time for fundamentals - was voiced by Abhishek Kumar, senior energy analyst at Interfax Energys Global Gas Analytics, who told CNBC that "While consensus is growing on extending the cap by another 9 months, a deeper cut is unlikely" - and deeper cuts are what many experts insist is required for OPEC's reduction strategy to have any positive impact on supply and demand, especially in light of U.S. shale's recovery plus Libya, Nigeria, and many other nations ignoring the cutbacks and pumping full out.

Corroborating Kumar's sentiment was Jabbar al-Luaibi, oil minister for Iraq, which has been the worst cheater of the initial wave of cuts (it pumped 80,000 more barrels of oil per day than permitted): he told reporters "It's only the freeze we are talking about; we will continue with the current cuts."

Yet another reason for Wednesday's losses may be due to the growing awareness that OPEC is providing a band-aid solution to the oil and gas woes: BMI Research said the cartel's cuts will only result in a balanced market this year, and from 2018 onward markets will return to oversupply.

And even in the narrow confines of a cut extension, the specter of non-compliance looms: although Iran most recently declared its support for a cutback extension, its oil minister Bijan Zanganeh on Wednesday dodged the question of whether the Islamic republic would actually participate in the cuts and instead made a brief statement about the importance of full compliance.

Injecting a dose of optimism into the proceedings was Neil Atkinson, head of oil market division for the International Energy Administration, who told Bloomberg that not will an extension almost certainly be agreed upon on Thursday, oil demand is growing by 1.3 million barrels per day this year and indications are that China's demand growth is stronger than expected: "I don't think demand is too much of a problem."

Earlier this week, Goldman Sachs stated that while a nine month extension would normalize inventories by early 2018, "we see risks for a renewed surplus later next year if OPEC and Russia's production rises to their expanding capacity and shale grows at an unbridled rate."