Oil prices drop as OPEC output cut extension disappoints the market

Oil prices fell sharply on Thursday after an OPEC delegate said the oil producer group had agreed to extend cuts in production by nine months to March 2018.

That disappointed some investors, who had hoped that OPEC might reduce output even further to drain a global glut that has depressed markets for almost three years.

Brent crude oil dropped as much as $1.24 a barrel to a low of $52.72 before regaining some ground to trade 47 cents lower at $53.49 by 11:05 a.m. ET (1505 GMT). U.S. West Texas Intermediate (WTI) crude futures was 56 cents lower at $50.80, up from a session bottom of $50.08.

OPEC ministers are gathered in Vienna to decide how long to extend a deal with other major exporters, including Russia, to remove 1.8 million barrels a day from the market.

Ahead of a closed-door meeting on Thursday, Khalid Al-Falih, Saudi Arabia’s energy and industry oil minister told CNBC, “Nine months with the same level of production that our member countries have been producing at is a very safe and almost certain option to do the trick.”

“It is a disappointment that OPEC hasn’t done more to balance the markets,” said Olivier Jakob, energy markets analyst at Swiss consultancy Petromatrix.

“A nine-month extension of the output cuts is already baked into prices. This shows there’s not much more OPEC can do.”

Saudi Arabia’s delegate said all options had been considered ahead of the announcement, including deeper cuts and a possible six-month extension.

OPEC also discussed extending the cuts through June 2018 if the market deteriorates, sources told Dow Jones. That option would be decided near the end of the nine-month extension and could be triggered by high global stockpile levels and low oil prices, the sources said.

Miswin Mahesh, an oil analyst at Energy Aspects, told CNBC via telephone that “oil prices are always choppy” when OPEC meetings are in session.

He added that the price fall on Thursday morning “was probably triggered” by “imbalances” in the market with some expecting deeper cuts to OPEC production. A nine-month extension was already baked into the price, according to Mahesh.

OPEC is trying to drive crude stockpiles in developed nations down to the five-year average. They currently stand about 300 million barrels above that level.

Surging U.S. production, spurred by higher oil prices, combined with weak fuel demand and persistently robust OPEC exports in the first half of the year to offset the cartel’s production cuts. That has left global stockpiles near record highs.

Deeper cuts would likely put strain on OPEC members’ compliance to the deal — which has been historically high — and encourage non-OPEC producers to pump more, according to Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions.

“Compounded by seasonal demand growth, the cuts should help accelerate global inventory drawdowns over the balance of the year and will likely set a new floor for crude oil prices in the low $50 per barrel range,” he said in a statement.

Still, energy consultancy Wood Mackenzie said keeping existing oil output at current levels for another nine months would result in a 950,000 barrels per day production increase in the United States, thus undermining OPEC’s efforts to balance supply and demand.

U.S. oil production has already risen by more than 10 percent since mid-2016 to more than 9.3 million bpd as drillers take advantage of higher prices and the supply gap left by OPEC and its allies.

Investors are also nervous about rising output from Nigeria and Libya, which are exempt from cutting production as they attempt to restore supplies sidelined by internal conflicts. It was not clear on Thursday morning whether OPEC would impose any limits on the two members’ output during the nine-month extension.

— Reuters contributed to this story.

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