Crude prices have dropped following Opecs decision to extend its existing oil production for a further nine months with many traders anticipating deeper or longer supply reductions.
The 14-member exporting group and its non-Opec allies announced the extension of the agreement on 25 May at the end of talks in Vienna, where speculation was rife over the level of agreed cuts.
Based on our conversations, some market participants may have expected either a deeper cut, a longer one, inclusion of more countries, or other such icing on the cake, said Barclays analyst Michael Cohen in a note following the announcement.
When Opec first announced its six-month agreement to withhold supply on 30 November 2016, the oil price immediately rallied and Brent was trading at between $50 and $60 a barrel in December for the first four months of 2017.
Although Opec producers were overall compliant with the agreed cuts, increasing supply from the US shale oil sector boosted my higher prices has added to the global supply overhang.
US-based consultancy IHS Markit forecasts that average crude production in the US and Canada will rise by 1.6 million barrels a-day (b/d) between 2016 and 2018, offsetting some of the impact of the agreed reduction of Opec and its partners of close to 1.8 million b/d.
Saudi Oil Minister Khalid al-Falih believes the agreed supply cuts will bring balance to the market by the end of the year.
We considered various scenarios from six to nine to 12 months and we even considered options for higher cuts, said the minister. All indications are solid that a nine-month extension is the optimum, and should bring us to within the five-year average by the end of the year.
IHS Markit analyst Bhushan Bahree, believes Opec producers do not want to see crude prices drop below $50 a barrel as they did in early May and this level represents a line in the sand.
The end of March 2018 need not be a hard stop, said Bahree. While no exit strategy is laid down, Al-Falih indicated that the alliance intended to deal flexibly with whatever situation arose, implying that the extent and duration of the cuts arrangement was dependent on market balancing and price imperatives.
Although the market had an immediate negative reaction to the announcement, with Brent dropping $2.60 to $51.36 a barrel on 25 May, Barclays says the cuts will be sufficient to reduce oversupply during the summer.
In our view, todays dip is likely short lived, and we continue to believe that inventory draws in the coming summer months will be supportive of prices, said Cohen.