OPEC Could Extend Production Cut Agreement if Inventories Still High

OPEC could extend its oil supply-reduction pact with non-members or even apply deeper cuts from July if global crude inventories fail to drop to a targeted level, OPEC sources said.

The group, together with Russia and other non-OPEC oil producers, agreed late last year to cut output by 1.8 million barrels per day (bpd) to reduce a price-sapping glut. The deal took effect on Jan. 1 and lasts six months.



For global petroleum inventories to fall by some 300 million barrels to the five-year average, producing countries must comply 100 percent with the supply accord and growth in demand for crude will have to stay healthy, the sources said.

“If we have full commitment by everybody, inventories will go down. By sometime in the middle of this year, maybe they will go near the five-year average. But that’s if you have 100 percent compliance,” one OPEC source said.

“The question is, by how much will they fall? For that, you have to wait and see.”

The Organization of the Petroleum Exporting Countries meets next on May 25 to decide on supply policy, with non-members possibly also invited to attend.

OPEC producers in January achieved 93 percent compliance with the pledged reductions, of which the group’s de facto leader, Saudi Arabia, contributed the biggest chunk.

Officials in the 13-member OPEC, including Saudi Energy Minister Khalid al-Falih, have said oil stocks need to fall near to their five-year average for the group to say markets are becoming balanced.

Simple arithmetic shows that a cut of 1.8 million bpd for six months would reduce crude supply by around 300 million barrels over the period of the agreement, industry and OPEC sources say.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza