Tuesday 24 April 2018

Oil price rally to be short-lived as OPEC deal not enough

Oil hit an 18-month high of $58.37 a barrel on Tuesday. Photo: Reuters
Oil hit an 18-month high of $58.37 a barrel on Tuesday. Photo: Reuters

Florence Tan

The oil price rally sparked by an Opec-Russia deal to cut output is likely to be short-lived, say traders in Asia, because the agreement may only draw more supplies from storage tanks and more crude shipments from the United States.

Even without increased supplies from elsewhere, if the Organization of the Petroleum Exporting Countries (Opec) and Russia do reduce production by 1.5 million barrels a day (bpd) as pledged, the cuts would not be deep enough to shrink a glut that began to build in mid-2014, traders said.

"The cut by Opec will be largely offset by increases in US production, where the rig count has already increased," said India Oil Corp's Director of Finance A K Sharma.

"So surplus (oil) will stay in the market. If there is any impact, it will be short term."

Higher oil prices and lower production costs are encouraging US shale operators to increase output, while Kazakhstan started production at the Kashagan field in October.

Traders said the extent of the impact of the output deal will also depend on how it affects exports from Saudi Arabia and other Opec members. Cuts in export supply from producers could come from changes in operational tolerance, a contractual clause that allows either the buyer or seller to increase or reduce volumes by up to 10pc, trade sources said.

Production cuts early in the year are also a normal response to a low-demand season in February and March when Asian refiners typically shut for maintenance, he said.

Asian refiners are more concerned about the impact of higher oil prices on demand and profitability rather than the Opec supply cuts as most have other crude sources to turn to. (Reuters)

Irish Independent

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