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OPEC continues to monitor the impact of production cuts

Published: 11:44 22 Sep 2017 EDT

Vienna OPEC meeting

Oil producers will be hoping that positive sentiment is back in the market to stay. There was a rise in crude inventories this week but the market is looking to longer term fundamentals in the hope of a re-balance. In early trading on Friday, Brent crude was priced above US$56 with WTI still holding above US$50 a barrel.

There was an unexpected rise in US inventories this week, and as operations resumed in the aftermath of Hurricane Harvey, more production was added. US stockpiles added 4.6 million barrels last week, but gasoline and distillate inventories were down. The US Energy Information Administration also said that domestic production was up 157,000 barrels to 9.510 million barrels a day.

Another surprise to the US market was the decline in working oil rigs, according to the Baker Hughes index. The rig count was down by seven to 749, the biggest decline since mid-January. Operators are using rigs more efficiently, but rig count numbers remain an important indication of the health of the US oil industry.

OPEC ministers continue to monitor the impact of production cuts and met in Vienna on Friday to consider next steps. Talk of deepening and possibly extending the cuts could become a reality if leading figures can gain enough support. Kuwait’s oil minister, Essam al-Marzouz who chairs the joint ministerial monitoring committee said that since the last meeting, “the oil market has markedly improved.” He added that “the market is now evidently well on its way towards rebalancing. “The Iraqi oil minister, Jabbar al-Luaibi spoke at a conference in Fujairah in UAE last week and said there was growing support for an extension of the cuts. The current agreement in cooperation with Russia and other non-OPEC producers to take 1.8 million barrels a day off the market, is in place till March 2018.

The oil market will carefully watch any moves by the US to escalate geopolitical tensions with Iran in coming weeks and months. President Trump delivered tough words in a speech at the United Nations this week saying the agreed Joint Comprehensive Plan of Action in 2015 that lifted oil sanctions against Iran, was “one of the worst and most one-sided transactions the US has ever entered into.” The head of commodity strategy at RBC Capital Markets, Helima Croft said that in the event sanctions were resumed by the US this would impact oil markets, as there would be a “call for consuming countries to make significant reductions in Iranian crude oil imports every six months.”  Companies currently doing business with Iran will be concerned because an American withdrawal from the agreement will mean those companies cannot engage with the US market.

The oil price has gained more than 15 percent in the last three months, the strongest performance since late 2004. The OPEC cuts have certainly led to a decline in supply on the market and a sense of rebalancing, but analysts warn against complacency as American shale players can ramp up production quickly in a stronger priced environment.

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