OPEC Statement on Cutback Extension Frustrates Analysts, Causes Further Market Declines

Will they or won't they is the question following a committee of Organization of the Petroleum Exporting Countries (OPEC) ministers congregating in Kuwait on Sunday to review their oil cutback initiative, in which an agreement was announced to review whether the cutbacks should be extended by six months until the end of 2017.

However, the formulation of the announcement seems to contain differing intent: Reuters reports that an earlier draft of the statement said the committee "reports high level of conformity and recommends six-month extension", while the final version states only that the committee had requested a technical group and for the OPEC Secretariat to "review the oil market conditions and revert ... in April, 2017 regarding the extension of the voluntary production adjustments."

An industry source suggested that the committee lacked the legal mandate to recommend an extension.

Not surprisingly, the lack of commitment caused West Texas Intermediate on Monday to drop 24 cents to $47.73 and Brent to fall 10 cents to $50.70 - and Harry Tchilinguirian, head of commodities strategy at BNP Paribas, believes the slide could continue: "The dropping of the recommendation to extend cuts in favor of technical review committee is likely to lead to a lot of disappointment and potential further liquidation of long positions by money managers that will put downward pressure on oil prices."

Analysts at JBC Energy said in a report about Sunday's talks, "We would see the relative lack of reaction in the price perhaps as a reflection of some disappointment that nothing more concrete was forthcoming."

Alan Bannister, regional director of oil content at S&P Global Platts, told CNBC that the original six month agreement "has been relatively successful" and that it "will be extended; the agreement has had a positive impact on prices, admittedly at the cost of some member companies....but I think they will be broadly satisfied that the agreement is leading to a higher price than would be the case otherwise."

He added, however, that U.S. shale producers will be monitoring developments closely, contributing to the "bearish factor which is overhanging the market."

But dissatisfaction with the outcome of Sunday's meeting persists, and it fell upon Olivier Jakob, managing director of Petromatrix, to state what is worrying experts the most: with the revision of the ministerial committee's statement, it is becoming more difficult to know who is responsible for what in OPEC: "That is not the best option to provide clarity to the oil markets."

Last week, Bill Baruch, chief market strategist at IITrader, warned that even if an extension is ratified, the rise in U.S. shale production alone would wipe out most of its gains: "The U.S. has already taken up two thirds of the OPEC cuts with the remainder of 2017 left."

He added that an extension is a lose-lose proposition, because if OPEC considers an extension and then fails to deliver, "that would be catastrophic for the market.....we're going to see lots of liquidation."