Finance

OPEC and Russian Federation have failed to fix the epic oil glut

OPEC and Russian Federation have failed to fix the epic oil glut

Oil prices edged higher on Friday as some investors were tempted back to a market that tumbled five percent in the previous session on disappointment that an OPEC-led decision to extend current production curbs did not go deeper. The OPEC countries announced oil production targets which failed to meet investors' expectations.

The Organization of Petroleum Exporting Countries - along with other large producers, including Russian Federation - on Thursday announced plans to extend their 1.8 million barrel per day oil output cut another nine months in effort to drive up oil prices.

Canada and Libya's production is also inching higher, which together with surging United States production has hindered Opec's efforts so far this year as global inventories continue to remain at elevated level.

Crude prices are down from a high of $114 in June 2014 due to a glut caused by USA production reaching record levels in 2015 as hydraulic fracturing, or fracking, technology let drillers tap oil in shale, coupled with Saudi Arabia's refusal to cut production to maintain its market share and put small US drillers out of business.

Oil stockpiles in developed countries in the OECD jumped by 24 million barrels during the first quarter to a new record of 1.2 billion, according to the International Energy Agency.

The credibility of this shift in Saudi strategy will be "easily monitored", said Roger Diwan, the oil analyst at consultant IHS Markit Ltd., who attended the OPEC meeting in Vienna.

That's why Morgan Stanley downgraded its oil price forecast for the end of 2018 to $55 a barrel from $60 previously.

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Rising U.S. shale output won't derail OPEC's goals and a nine-month extension will "do the trick", Al-Falih said Thursday after the meeting in Vienna.

The alliance between OPEC and non-OPEC producers is strong, but not strong enough to derail production momentum from North America, analysis finds.

Gaining back some of those losses, Brent crude futures LCOc1 were at $51.83 per barrel at 0708 GMT, up 0.37 cents, or 0.7 percent, from their last close.

That could increase supplies and drag down prices again.

The U.S. Energy Information Administration estimates U.S. oil production could increase to more than 10 million barrels per day next year, up from 8.9 million in 2016. The global benchmark crude traded at a premium of $2.63 to WTI. Some market participants had priced in more aggressive output cuts from the Organization of the Petroleum Exporting Countries and other producers. "We have much oil, some would say too much oil".

"We have refineries that can process crude from the USA, we are buying from Canada, Russia, Latin American and African countries and also Far Eastern suppliers", B Ashok of Indian Oil Corp said.

"Herein lies the OPEC dilemma - a return to production capacity in 2018 to grow market share would lead to a sharp collapse in prices", Goldman wrote.


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