Here's why you can expect oil output cuts to continue

Here's why you can expect oil output cuts to continue

The top oil producer in OPEC, Saudi Arabia, favors extending the output curbs by nine months rather than the initially planned six months, to speed up market rebalancing and prevent crude prices from sliding back below $50 per barrel.

The committee monitoring progress of the output restraint deal between Opec and 11 other non-member countries today recommended extending the deal for another nine months once its initial period expires at the end of June.

June West Texas Intermediate futures crude rose 34 cents, or 0.7%, to settle at $US51.47 a barrel in NY, but late dipped back under the $US51 level in electronic trading.

Last week, Saudi Arabia and Russian Federation telegraphed the events of the May 25 meeting, announcing support for a nine-month extension of the existing production cuts - 1.2 million barrels per day (mb/d) from OPEC plus 558,000 barrels per day (bpd) from a group of non-OPEC countries. The country's Energy Minister Kanat Bozumbayev said he will seek to renegotiate the cap on its output before agreeing to an extended deal. But other delegates told Reuters they predicted a smooth meeting with a nine-month extension likely to be agreed. Saudi's Falih said on Monday he expected the new deal to be similar to the old one, "with minor changes". In an exclusive interview with Kuwait's news agency, the Kuwaiti oil minister Essam al-Marzouq kept all options on the table including deeper cuts: "All options are on the table and could be discussed".

The agreement, which marked a major policy turnaround for OPEC, helped push prices to their current level of between Dollars 50-55 per barrel, but was due to expire on June 30.

The cuts are expected to be extended by nine months under the urging of the Saudi Arabia and Russian Federation, the world's top two oil producers.

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Inevitably, there was a barrage of comments from OPEC members ahead of Thursday's Ministerial meeting. There is Opec meeting on May 25 where they will decide whether to continue the production cuts they have decided in November a year ago.

"When you have backwardation, it tells you to drain your tanks and produce more in order to monetise your production and reserves".

Oil rose on Tuesday as expectations of an extension to OPEC-led supply cuts supported prices, reversing losses earlier in the session after a White House proposal suggested selling off half the country's huge oil stockpile.

"Oil prices rebounded last week despite the continuing overhang of growth in U.S. oil production", says Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.

"The tricky part is going to be if things get balanced after the nine months, avoiding a production free for all and there is no discipline amongst producers", he said. "He was calling back to his prime minister saying we can't take the second largest cut in OPEC".

While the market sees an extension by nine months as the base-case scenario, surprises on Thursday could include a deepening of the cuts.

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