Published: Sun, May 14, 2017
Markets | By Lucia Cruz

Oil tumbles amid oversupply fears, unlikelihood of deeper Opec cuts

Oil tumbles amid oversupply fears, unlikelihood of deeper Opec cuts

Crude oil prices plunged to their lowest level in five months Thursday, erasing all of their gains since OPEC and Russia's decision to cut their output levels on November 30.

Late last year, the Organization of the Petroleum Exporting Countries (OPEC), together with other key producers such as Russian Federation and Oman, announced that they would cut oil output for the first six months of this year to reduce a vast global overhang of unused crude.

West Texas Intermediate for June delivery dropped as much as $1.76, or 3.9 percent, to $43.76 a barrel on the New York Mercantile Exchange, and was at $45.06 at 8:55 a.m.in London.

Non-OPEC producers such as Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan agreed to reduce output by 558,000 bpd starting from January 1, 2017 for six months, extendable for another six months, to take into account prevailing market conditions and prospects.

Oil prices were hovering at near five-month lows on Friday, after comments from the Kremlin suggesting indecision over whether to extend production cuts sent crude tumbling overnight.

Both contracts slid during the session to the lowest since November 30, the day OPEC agreed to cut supply.

The limits were part of a bid to reverse a global decline in oil prices that began in 2014, the symptom of a supply glut. Economists forecast that job creation bounced back last month after a disappointing March, in the latest sign of USA economic strength supporting the Fed's plans for more interest rate increases this year.

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An extension to the production cut agreement is far from a done deal, with many details to be negotiated, including cut levels, exemptions and duration, amid an increasingly sceptical market. It fell 4% on Thursday. The S&P Oil & Gas Exploration and Production Select Industry index declined as much as 4.9% to the lowest since August. "They did say current output cuts were likely to be extended", according to CNBC. "On the other hand, one can only ponder how long they are willing to shoulder the burden of supporting oil prices on their own", PVM Oil Associates analyst Tamas Varga said.

"It certainly may have reinforced people's negative expectations for US oil demand going forward", Mr. Saucer said.

Net, the faster decline in long-term oil prices than we expected this year is a clear downside risk to our spot price level forecast, even if it helps slow United States production growth and achieve the inventory draws and the rotation of the forward curve into backwardation that we forecast.

The oil price surge saw U.S. shale production rekindled and output is up a massive 468,00 barrels a day to 9.239 million barrels a day.

OPEC will meet May 25 in Vienna to decide whether to extend the deal.

Some market observers note that OPEC's importance in charting the course for oil prices is being diminished as USA shale producers rush to up production.

Russia's Energy Minister, Alexander Novak, said in written comments on Thursday that his country is inclined to extend.

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