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OPEC extends oil output cut until 2018

Never mind waiting for the ink to dry – the pen had not even met the paper when the markets began to slide.

This week OPEC met with 11 non-OPEC producer in Vienna to try to turn around the fortunes of oil. However their perceived failure to adequately deal with the issue at hand led to predictable results. The oil price sank by around 5%.

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Brent crude fell to $51.90, and WTI reached $48.78.

Under the new agreement, OPEC and the 11 non-members who’ve ‘voluntarily’ been restricting oil production since January, will continue for the next nine months.

The Saudi Arabian energy minister Khaled Al-Falih argued this had been a reasoned judgement call: “We considered various scenarios from six to nine to 12 months and we even considered options for higher cuts. All indications are solid that a nine-month extension is the optimum, and should bring us to within the five-year average of inventories by the end of the year.”

It’s interesting to note Russia’s internal split over the move. While the Energy Minister Alexander Novak was reportedly the ‘lynchpin’ in delivering the non-OPEC members, his Kremlin colleagues in the Finance Ministry issued a warning that this could prompt a second shale oil revolution. It predicts oil prices dropping to $30 pb.

The reaction has been mixed. Some investors had hoped they would go further and be bolder. Neil Wilson of ETX Capital told The Guardian: “OPEC members had a chance today but bottled it. A nine-month extension just isn’t enough to really lift oil prices as we’ll continue to see US shale fill the gap. Having said they’d do whatever it takes, OPEC is looking a bit toothless now.” Other accusations were that OPEC had ‘bottled it’, were ‘quaint’ and ‘old-fashioned’.

Others such as Wood Mackenzie say the extension could ultimately raise prices to $60 pb by the end of 2017; however acknowledged this would have an undesired impact. “Prices holding above $60,” said analyst Ann-Louise Hittle, “means stronger investment in almost all US tight oil plays.”

The decision to prolong the slow and steady approach plays right into their hands. The US competition will enter the newly available market space by drilling at a lower price they can still afford, and enjoy whatever higher prices might come their way. Mr Al-Falih said that though he anticipates this, it will not happen to “the degree that it will derail what we are doing.”

A number of reports have looked back at the Saudi playbook which brought us to this point: the decision in 2014 to flood the market and kill the competition. Though OPEC in the end chose to wave the white flag, as reports in the 12 months between June 2015 and July 2016 US oil production had shrank by 12%, 123 US oil companies had filed for bankruptcy and credit began to dry up. The decision to start slowing curbing production was the lifeline shale needed.

President Trump may have bowed at the knee last week, but the Saudis are really the ones handing over power now.