Oil prices rise a day ahead of OPEC, non-OPEC meeting

Oil prices edged up on Wednesday ahead of the meeting between Organization of Petroleum Exporting Countries (OPEC) and non-member states where they are set to discuss if the agreement to limit crude output should be extended.

Both Brent crude and WTI crude were trading up 0.5 percent at $54.45 per barrel (bbl) and $51.72/bbl, respectively, around noon in Dubai.

The oil producing countries will meet in Vienna tomorrow and the general consensus is that they will extend output cuts, given that earlier this month OPEC major Saudi Arabia and non-member leader Russia voiced their support on prolonging the deal for another nine months.

Since then, crude prices have jumped as much as 10 percent from below $50/bbl.

“Current data shows that markets are already close to balancing despite higher US output due to better than expected OPEC and non-OPEC compliance to agreed November cuts,” Mustafa Ansari, energy research analyst at APICORP, told Argaam.

Ansari expects an extension of the deal to put forward pressure on oil prices, but does not foresee a sharp rise. “We still expect prices to end the year between $50 and $60,” he said.

A further tightening of output ceiling, however, may lead to a faster climb in prices, at least in the short-term, analysts said, pointing to reports that deeper cuts are likely to be part of the discussion during the May 25 meeting.

“If the cuts are merely to be extended, this is likely to be met at best with a neutral reception, if not even with disappointment,” Germany-based Commerzbank said.

An extension of the existing production cut deal appears to be largely priced into the market, Edward Bell, commodity analyst at Emirates NBD, said in a recent note.

“The duration (of the deal is) the main variable for debate,” Bell added, while also highlighting the need for the participating countries to adhere to their respective limits.

Talking about the bearish pressure from higher US shale oil production, APICORP’s Ansari noted that the current US production is still dependent on hedging as future prices are higher than the spot price. “If OPEC is able to accelerate stock withdrawals, we could see the forward curve go into backwardation and deter shale producers as they cannot secure revenue by hedging,” he added.

In case the output deal is not extended tomorrow, there will be downward pressure on prices but they will not go “tumbling down as market is already close to balancing,” Ansari said.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com