Oil heads for 2nd week of gains as output cut extension expected

Oil heads for 2nd week of gains as output cut extension expected

Saudi Arabia and non-OPEC Russia have said they want an extension to output reductions of nearly 1.8 million barrels per day (bpd) that were initially agreed to run in the first half of 2017.

Production cuts were expected to be extended by six months, but the likelihood of a longer agreement has given the market more confidence that the push could significantly reduce global oversupply.

"Saudi Arabia, Russia, Kuwait and Iraq have all stated that they support a nine-month extension", Gene McGillian, manager of market research for Tradition Energy in Stamford, Conn., said by telephone.

After settling on Wednesday at their highest levels in almost a month, light, sweet crude futures for delivery in June were recently down 0.3% at $48.91 a barrel in the Globex electronic session.

Crude prices staged a mild rally in Asia on Friday with US crude nearing the key $50 a barrel mark ahead of weekly rig count figures expected to set the near-term tone ahead of next week's meeting of OPEC and allied producers on production cuts.

With such an extension already priced in, a real surprise could come if OPEC made a decision to extend for longer, deepen output cuts or restrict exports.

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In the week ended May 12, 2017, crude oil inventories were ~110.3 MMbbls more their five-year average. OPEC ministers and their allies will be meeting in Vienna on May 25 to decide on extending their production curbs until May 2018.

The organisation said world oil supply fell by 0.41 million barrels per day (mbpd) in April to average 95.81 mbpd. OPEC agreed to slash the output by 1.2 million barrels per day from January 1. August Brent crude oil settled at $52.67, up $0.23 or +0.44%.

The cost to drill for shale has fallen by more than one-third in the last two years, analysts said.

Traders and investors have grown increasingly concerned about a supply glut several months into the deal between OPEC and non-OPEC members like Russian Federation to clip production by 1.8 MMbbl/d.

OPEC also raised its forecast for oil supply growth from non-members in 2017 but kept its outlook for global crude demand unchanged at 96.4 million bpd.

"The big shift - and what I think OPEC is trying to generate - is a shift in the curve to backwardation, where spot prices sit above forward prices", Currie told CNBC's "Power Lunch" on Wednesday. USA producers are not party to any agreements capping production.