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OPEC agrees to extend oil production cut

May 25, 2017

In an attempt to keep the price of oil above $50 a barrel, OPEC has extended the production cut for another nine months. The decision came at a meeting between officials of oil exporting countries in Vienna.

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Mexiko Ölbohrinsel - Pemex
Image: Getty Images/AFP/A. Estrella

OPEC has committed to an extension of the limit in crude oil production to 1.8 million barrels a day until March 2018 in the hope of achieving sustained price recovery.

Since mid-2014, when oil hit a high of over $100 a barrel, its value has plummeted to $47 as recently as early May. However, despite the 50% drop in three years, the measure to limit production has stabilized the market, temporarily at least.

Russia and Saudi Arabia, OPEC's de facto leader, had made the commitment last week to extend the cut in production, making a pledge to do "whatever it takes" to boost prices.

USA Öl- und Gasindustrie in Texas
The oil price rise has spurred growth in the US shale industry, which is not participating in the output deal.Image: Getty Images/S. Platt

The price rise this year has spurred growth in the US shale industry, which is not participating in the output deal, thus slowing the market's rebalancing.

US shale revival

Some believe the impact of Thursday's OPEC agreement could be short-lived, as American shale production could be revived. The higher oil prices climb and the more shale operators that accelerate production, the more OPEC has to cut.

More than 400 oil rigs are now working US shale fields - an increase of more than 120 percent compared with a year ago - and US producers are poised to expand further, even if prices only edge moderately upwards as a result of the OPEC cuts.

Their output is already partially offsetting the cuts. The upshot is that the price of oil - and derived products like fuel - is unlikely to increase much in coming months, analysts say.

That will be welcome news to consumers and energy-hungry businesses worldwide but could continue to strain the budgets of some of the more economically-troubled oil-producing nations, like Venezuela and Brazil.

Markets underwhelmed

Venezuela Ölfässer von Venoco
Brent crude fell 1.3 percent to around $53 a barrel as the markets were disappointed OPEC would not deepen cuts.Image: Getty Images/AFP/M. Gutierrez

Although the nine-month extension was widely expected, the initial reaction in the markets was of disappointment that OPEC didn't cut deeper or introduce a 12-month extension.

Unlike in December 2016, when prices surged on the landmark OPEC decision to restrict production, Brent crude oil dropped as much as $1.24 a barrel to a low of $52.72 on Thursday, before regaining some ground to trade 80 cents lower at $53.16. US light crude was 90 cents lower at $50.46.

"It is a disappointment that OPEC hasn't done more to balance the markets," said Olivier Jakob, energy markets analyst at Swiss consultancy Petromatrix. "A nine-month extension of the output cuts is already baked into prices. This shows there's not much more OPEC can do."

"Nine months was priced," said Amrita Sen, analyst at consultancy Energy Aspects. "We thought the market would sell off if it was just (an extension of) nine months."

mds (Reuters/AP)