Oil rises on expectations of extended, possibly deeper, output cut

Saudi Arabia's energy minister Khalid al Falih at a meeting of the Organization of the Petroleum Exporting Countries OPEC

The first OPEC delegate said he did not believe OPEC would deepen existing cuts, unless Saudi Arabia and its Gulf allies offered to take the bulk of the hit: "I still believe it is unlikely at this point".

OPEC will likely agree to extend production cuts for another nine months, delegates said on Tuesday as the oil producer group meets this week to debate how to tackle a global glut of crude.

India now imports 86 percent of its oil needs from OPEC states to meet its 4.6 million barrels per day (bpd) refining capacity.

Saudi arrivals in April were down 3.9 per cent from a year ago to 3.96 million tonnes, or about 963,000 bpd, down from the 1.07 million bpd rate in March, customs data showed.

Nomura estimates that OPEC has been 90%-compliant with the promised cuts so far, but the rebalancing of supply and demand could still be as far as 18 months away, after the buildup of stocks over the past three years. So far, Saudi Arabia has shouldered most of the production cuts, helping the cartel to achieve over 90% compliance to their promised cuts. Al-Luaibi had previously said that Iraq would support a six-month extension. Parties to the OPEC-led effort are coordinating around an agreement to extend the deal by at least six more months.

By extending cuts into 2018 and promising to boost output next year, OPEC could force the oil market into backwardation that would scare away private equity and other investors who have been funding the American shale producers.

The combination of optimism surrounding this week's OPEC meeting and a generally stronger Euro tone has provided further net support to oil with prices at one-month highs.

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Price of the Brent crude oil at the London ICE (InterContinental Exchange Futures) rose $0.42 to trade at $54.03.

Rising production from non-OPEC and some OPEC countries like Libya and Nigeria not included in the agreement is overwhelming cut backs made by Saudi Arabia, Russia and Middle East producers, all set against a backdrop of lacklustre demand growth as vehicle economy improves mitigating the "benefit" of rising auto sales to demand.

With others including Kuwait signalling their assent, 24 out of 25 analysts polled by Bloomberg News said they expected the curbs to be prolonged, the only question being for how long.

OPEC members, Russian Federation and other oil producers had originally agreed previous year to cut production by 1.8 million barrels per day for six months starting January 1. "So maintaining the current discipline of production cuts is key and we expect the current quotas to hold for the most part".

Releasing reserves would add supplies to already high and rising US production of 9.3 million bpd, not far off levels of top suppliers Saudi Arabia and Russian Federation. But it also spurred growth in the US shale industry, which is not participating in the output deal, thus slowing the market's rebalancing.

Oil prices dipped at the start of the month, before gaining again after comments from top exporters that supply cuts agreed last November would be extended.

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