Oil Prices On The Rise As Supply-Cuts Extension Expected

The price of oil increased on Monday after reports emerged that a supply cut initiated and led by OPEC may be extended. Further, the reports indicated that the supply cuts would be deepened for purposes of tightening the market and propping up prices.

At 0145 GMT futures of Brent crude had risen by 0.6%. This was an increase of 32 cents having previously closed at $53.93 a barrel. WTI crude futures, on the other hand, rose above the $50 level to reach $50.65 having increased by 0.6% or 32 cents as well. The two benchmarks have seen an increase of over 10% since they hit the lowest levels in the month of May.

Supply cuts

The rise in price is attributed to the expectation that an OPEC pledge that member countries as well as non-member countries such as Russia would be reducing their supplies by approximately 1.8 million bpd would get an extension to possibly next year in March. Initially, the supply cut had been slated for the first six months of 2017.

Besides the extension, there were also discussions on increasing the level of cuts as the OPEC meeting to be held on May 25 in Vienna, Austria approaches.

“Oil soared … as rumors swirled that OPEC… was considering recommending the double whammy of a production cut extension and deeper cuts ahead of this Thursday’s meeting,” a Singapore-based OANDA analyst Jeffrey Halley, said.

Glut in the market

According to James Woods, an analyst at Rivkin Securities which is based in Australia, the reason for the deeper cuts is that this is what might be required in order to get rid of the glut in the market. As a testament to that, oil supplies from OPEC members in 2017 have not decreased in comparison to 2016 when the glut was thought to be at its worst. Net revenues for OPEC will actually rise this year to approximately $539 billion compared to last year as per a report by the Energy Information Administration of the United States as a result of not just higher oil prices but also higher output from the member countries.

Drillers in the U.S. are also said to be undermining the OPEC supply cuts by increasing production as the oil cartel tries to cut back. According to Goldman Sachs the number of rigs have increased by 128% in the United States since mid-last year leading to an increase in U.S. oil production of close to 900,000 barrels per day or about 10%.