Opec faces headache as oil prices slip

18 June 2017

Excess inventories forecast to persist into 2018 despite extension of supply cuts by Opec and partners

Opec is faced with a headache as it approaches a month since its members agreed to extend agreed production cuts for a further nine months.

Although the move was aimed at reducing global oversupply, it has been followed by a mini collapse in oil prices, with Brent trading at below $50 a barrel in recent weeks, hitting a 2017 low of under $47 on 15 June.

The Paris-based International Energy Agency’s monthly report released on 14 June warned that excess inventories are likely to persist into the 2018. Higher than expected demand growth in next year is forecast to be offset by supply increases from the US and other non-Opec producers in what the IEA said “makes sobering reading for this producers looking to restrain supply”.

Saudi Arabia and non-Opec Russia – the two largest two producers involved in the agreed production cuts – hinted that the new agreement would be more flexible and able to react to market forces.

This will inevitably raise questions around whether the oil exporters involved will look to deepen the cuts in order to balance supply and demand, and hasten the reduction of global inventories.

Attempts to reduce supply are being hampered somewhat by within Opec itself. Libya and Nigeria – both exempt from the production cuts – are both adding to production. Meanwhile, other countries such as Iraq have not met their agreed compliance to the agreement.

UAE Energy Minister Suhail al-Mazrouei said on 17 June that was no need for an extraordinary Opec meeting to discuss whether the production cuts are having the desired effect.

“We are at the beginning of the agreement. I think we need to give it a little time,” he told reporters in Dubai.

If Brent continues to trade at below $50 a barrel over the summer, Opec and its partners will be faced with some difficult questions about their market intervention.

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