OPEC Opts to Extend Production Cuts

Fronted by the world's major oil-exporting nations, what OPEC says generally goes. Now, the intergovernmental organisation has flexed its muscles yet again, and extended its production cuts by nine months.

After a meeting in Vienna, the Saudi Arabian-led group and its allies delivered what had already been publicised for days – a hard-hitting plan to prolong output cuts for almost an entire year. Referring to OPEC’s efforts to stabilise global oil prices, Saudi Arabia’s Energy Minister Khalid Al-Falih is confident that the extension will “do the trick." And if it doesn’t, he’s confirmed that OPEC won’t hold back on "further interventions."

Understandably, the move drew its fair share of criticism. "The Saudis have been trying to put a happy face on this thing," comments John Kilduff, a partner at New York-based hedge fund Again Capital. "But this is all they could get, and that’s disappointing to the market."

OPEC sends an underhand caution to US shale market

At the press conference, Saudi Arabia’s Energy Minister Khalid Al-Falih expressed hopes that US shale producers will moderate growth, and avoid disrupting the industry. His comments were largely fuelled by America’s growing crude inventory, which is one of the most critical drivers of the global supply glut. Shale drillers continue to add rigs every week, and as a result US production is on the rise.

Russia plays it cool

Meanwhile, Russian Energy Minister Alexander Novak took a more nonchalant approach. He maintains that Russia isn’t concerned about the cut, and expects oil to average around US$55 to US$60 a barrel this year. Al-Falih also talked down the drop, reassuring investors that the market’s "knee-jerk reactions” aren’t a concern.

A short sighted plan?

Despite the nonchalance from Russia and Saudi Arabia, analysts have pinpointed a problem. Primarily, the fact that because the nine-month extension was already priced into the market, investors need to know what OPEC’s strategy is moving forward.

"To get price stability, we need to know what the endgame is," says Ebele Kemery, head of energy investing at JPMorgan. She alludes to the predicted oversupply that could arise in 2018, and warns that without "clear messaging around an exit strategy" market volatility will endure.

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