OPEC Unlikely to Extend Production Caps as Oil Price Holds Steady

OPEC and Russia will meet in Vienna on Friday with major producers unlikely to entertain discussions of extending production caps amid strong oil prices and falling reserves.
By Paul Whitfield ,

Oil trader's attentions will be firmly fixed on Vienna on Friday, Sept. 22, where OPEC members and Russia are meeting to discuss whether or not to extend production cuts that have underpinned oil's rise to over $50 a barrel this year.

Comments from member delegations heading into the meeting were mixed, leading to an expectations that the cuts will not immediately be extended beyond their expiration date in March next year.

"While participants have commented on the possibility of an extension of the cuts, there appears to be no commitment from the largest producers (Saudi, Kuwait and Russia)," noted Goldman Sachs analysts including Damien Courvalin and Callum Bruce. "This is consistent with their behavior earlier this year to wait until closer to the expiration of the cuts to assess their effectiveness."

Oil prices were little changed in early European trading on Friday as the meeting got underway. The U.S. benchmark West Texas Intermediate futures for delivery in November traded at $50.55, exactly in line with their Thursday close. Brent crude futures for November also traded largely in-line, down a slim 0.07% at $56.39, to remain near its highest point since February.

Russia's oil minister Alexander Novak and his Kuwaiti counterpart Issam Almarzooq this week said it was too early to talk about extending cuts. That was at odds with comments from the Iraqi delegation, which had suggested that a further 1% cut to production was being considered, and to comments from Algeria's energy minister Mustapha Guitoni, who told Algeria's state-run press that further cuts could come out of the meeting.

Conversation amongst the represented nations will almost certainly turn to compliance, allowing members a hearty round of back-slapping. The oil producing nations pumped less oil than they were allowed to under the OPEC agreement in August, with cuts hitting a record 110%.

That over-compliance, combined with growing oil demand and a slower than expected ramp up in production out of Nigeria and Libya, have drain surplus reserves that had maintained pressure on oil prices. Oil stocks in the U.S., Europe, Singapore and Japan have fallen to only 7% above the average when measured on days of demand coverage, their lowest levels in years.

That could shift quickly if cuts aren't extended, according to the International Energy Agency, which is forecasting a return to an oversupplied-markets if OPEC and Russia allow their production caps to expire in March.

That may lead to a dip in oil prices early next year, but for the time being the outlook for prices remains bullish. Goldman is tipping year-end Brent prices of $58 a barrel.

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