"Opec's ability to control oil price 'diluted' by US" - Cantor Fitzgerald Europe

Marco Green
June 3, 2017

Oil benchmarks staged a marginal recovery in early Asian and European trading on Friday (26 May), after a decision by Opec and selected non-Opec producers to maintain their previously stated level of output cuts underwhelmed the market.

OPEC was under pressure from oil producers to reduce crude oil stockpiles from their current level at 3bn barrels to their long-term average of 2.7bn barrels. The figures offer some hope that people in Asia's second-largest economy might be spurred to start spending more as growth recovers although economists say the consumer price index's 0.3 percent increase is not likely to rise further.

Prices plunged after OPEC and other major exporters extended their deal to limit oil production for nine months , disappointing investors who were anticipating deeper output cuts.

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

While traders weren't necessarily questioning the suitability of the cut, it was fully priced in in the weeks leading up to the meeting and therefore the path of least resistance was clearly lower.

Brent crude futures were at $51.26 per barrel at 0500 GMT, down 20 cents, or 0.4 per cent, from their last close.

"OPEC agreeing to nine months without deeper cuts leaves prices at the mercy of inventories and United States production and demand", said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

OPEC announced the agreement to cut oil production in November, but surging US output, weak fuel demand and persistently robust OPEC exports in the first half of the year offset those reductions. But stubbornly high fossil fuel inventories - which have been maintained worldwide, but are most readily measured in the USA due to open customs data - have prevented the measures from buttressing oil prices in a lasting way.

"We have (so far) not had any impact in terms of any cut from any of these (OPEC) sources into India", said B. Ashok, chairman of Indian Oil Corp (IOC.NS), the country's biggest petroleum company.

EIA, in its May STEO, has already forecasted USA production to average above 10 mbpd in 2018, 0.7 mbpd higher from the current level. Historically, OPEC has played a pivotal role in balancing the market, but the group's market power has become increasingly diluted owing to the emergence of USA shale production.

David Arrington, president of shale oil producer Arrington Oil & Gas in Midland, Texas, said that how USA producers respond in coming months will have as much of an effect on pricing as OPEC's cuts. WTI prices lost about 75 percent, plunging to under $27 per barrel by early 2016.

On the other hand, India, the third largest consumer of oil, is contemplating importing oil from USA and Canada if OPEC countries continue the output cut.

Other reports by Click Lancashire

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