Analysts: Oil market expects cuts to be extended until 2018-end

OPEC ministers will meet in Vienna this week for the group’s 173rd meeting, in which they will make a decision on extending an oil output pact that has been in effect since the start of 2017.

The cartel agreed with a group of non-member oil producers, led by Russia, in December last year to cut crude output by a combined 1.8 million barrels per day (mbd) for the first six months of 2017. The deal was extended this year to run until the end of March 2018.

Despite geopolitical tensions between Saudi Arabia and Iran, and concerns over Russia’s role in the deal, investors widely expect production cuts to be extended for another six to nine months, analysts told Argaam.

Spencer Welch, Director – Oil Markets and Downstream, IHS Markit

The market is definitely expecting an extension of the deal through to end 2018; this is also the expectation of IHS Markit. Any other outcome, particularly no extension, a reduced extension duration, or a delayed decision until Q1 2018, is likely to cause the market price to fall.

The biggest risk is Russia withdrawing from the deal. This is still a low risk, but there is the potential because Russia is concerned about the high market price and losing long term market share.

Hussein Sayed, Chief Market Strategist at FXTM

Crude oil is undoubtedly pricing in good news and probably a little geopolitical risk premium. Markets expect a 6-9 months extension of productions cuts, which justifies the current price.

However, the most important factor is by how much each country will cut production and whether they will continue to comply. It will be interesting to see Russia’s response, especially [given] that many oil firms are putting some pressure on politicians to increase production. No deal will be drastic to oil prices, with a potential fall of more than 30 percent.

Carsten Fritsch, Senior Commodity Analyst, Commerzbank

Anything less than a 9-month extension would be a major disappointment and probably lead to a market sell-off like after the OPEC meeting six months ago.

Edward Bell, Director – Commodity Research, Global Markets and Treasury, Emirates NBD

The market is anticipating at a minimum that the cuts will be extended for all of 2018. OPEC's own assessments for next year point to the market truly rebalancing only by the middle of 2018, so the cuts will need to remain in place to achieve this target.

[The duration of a potential extension] is the main variable up for debate. A nine-month extension appears to be the Saudi objective whereas Russia seems to want a more flexible arrangement. Beyond the length, how the cuts are unwound is also important. If OPEC and its partners move back quickly to pre-deal levels, then as much as 1.8 mbd could come back on to markets and add a substantial downside risk to prices.

Ehsan Ul-Haq, Director – Crude Oil and Refined Products, Resource Economist

I think, the market is expecting an extension of the present cut by another nine months, although a few market participants also reckon that the extension might be of six months. There have also been rumors of deeper cuts but lasting only six months.

Whatever happens, oil producers' resolve is likely to be put under test in the next few months. It is easier to keep discipline if prices are low. However, prices are already above $60 per barrel, and it might be more challenging to convince OPEC members and several non-OPEC countries to restrain them from boosting production. Certainly, there are geopolitical challenges, which could reduce total global output and other producers might have to make up for any loss of supply.

Write to Jerusha Sequeira at jerusha.s@argaamnews.com