Oil price falls despite OPEC deal extension

 Oil price falls despite OPEC deal extension

The price of oil has fallen, despite oil-producing nations agreeing to extend production cuts for a further nine months.

The world’s major oil producers have voted to continue their production cuts into 2018 in an attempt to prop up the oil price. However, the deal failed to impress the market and the oil price started to slide even as the details of the agreement were being hammered out.

As of 08:51 (MSK) July futures for Brent of Brent crude fell 0.60% to $51.13. WTI (Light Sweet Crude Oil) in New York dropped by 0.78% to $48.52 per barrel. While yesterday the market sent prices nearly 5 percent lower.

"A nine-month extension of the output cuts is already baked into prices. This shows there's not much more OPEC can do," Reuters cited the energy markets analyst at Swiss consultancy Petromatrix Olivier Jakob as saying.

Energy consultancy Wood Mackenzie predicts that a nine-month extension would result in a 950,000 bpd production increase in the United States, thus undermining OPEC's efforts to balance supply and demand. 

OPEC countries and 11 other oil-producing nations, including Russia, first agreed to reduce production last December in an effort to boost flagging prices. The reduction was almost 1.8 million barrels per day - equivalent to about 2% of global oil production.

A senior analyst of 'Uralsib Capital', Alexei Kokin, speaking to Vestnik Kavkaza, noted that such a reaction of the market is quite natural, it indicates that the growth potential has already been exhausted. "In this case, an event is followed by a massive sale of assets," the expert explained.

He noted an analogy between the current situation and the events of November-December 2016, when the agreements were reached for the first time. "Before the meeting of the OPEC and non-OPEC countries, the market did not fully believe in the possibility of reaching an agreement. And when it happened, naturally, the price went up. And now it was priced in before the OPEC + meeting, and its probability was much higher," the senior analyst of 'Uralsib Capital' pointed out.

In addition, according to Kokin, some market participants expected that Nigeria and Libya would join the deal. "Moreover, the Iraqi oil minister said that Kurdistan isn't part of the deal, and it is almost 600 thousand barrels a day - quite substantial volumes," he said.

Nevertheless, the expert believes that the scale of the sale of assets is somewhat exaggerated, and prices will return to previous levels in the coming days.

The analyst pointed out that during the next 9 months of the agreement, the market is likely to achieve balance. "As a result, by the end of the year, we should see a decline in global reserves of oil and petroleum products. But there are two risks: first, there may be problems with increasing demand in the US, or in any developing country, for example, India or China. Second, the production of US oil shale oil can grow much more than forecasted, " Kokin concluded.

An associate professor of the Graduate School of Corporate Management of RANEPA, Ivan Kapitonov, recalled that Moscow and Riyadh announced their determination to extend the deal until March 2018 10 days ago. "That is, there was a positive signal in advance regarding the fact that all countries will agree to extend the reduction and then it was exhausted.While against the backdrop of data on the growing world reserves, it turned out that the positive had already weakened, and the negative had increased, which led to the current prices," he said.

In general, the expert warned that we should expect volatile prices with a subsequent decline. "We should expect volatility of $52-55 per barrel, and by the end of this year oil will additionally drop to $49 per barrel due to the fact that the US is increasing its output. The possible volatility in this case is $48-51," the associate professor of the Graduate School of Corporate Management of RANEPA said.

Commenting on the possibility of concluding a new agreement, which would be more advantageous for market participants, Kapitonov explained that it depends primarily on the US factor. "According to the latest data, the best shale deposits will dry up in two years. But as soon as the US decline or stabilize its output, an additional reduction in quotas is possible," the expert pointed out.