OPEC Extends Production Cuts for Nine Months.......

As widely expected, OPEC and its Allies announced on Thursday that it will extend its historic 1.8 million Bbl/d production cut to further reduce the global oversupply of oil and achieve a sustained price recovery. The cartel together with Russia and other non-members agreed to prolong their accord through March (giving exemption to Libya and Nigeria), but no new non-OPEC countries will be joining the pact and no option was set out to continue curbs further into 2018. Saudi Arabia's Energy Minister Al-Falih noted that the current cuts are working, adding that stockpile reductions will accelerate in Q3/17 and inventory levels will come down to the five-year average (~2.73 billion barrels) in the first quarter of 2018. Notably, Al-Falih also stated that while he expects a “healthy return” for U.S. shale, he believes this will not derail OPEC’s goals and a nine month extension will “do the trick,” Going forward, the Joint Ministerial Monitoring Committee (composed of six OPEC and non-OPEC nations) will continue watching the market and can recommend further action if needed.

Post the announcement, crude oil futures dropped by as much as 5% in New York on Thursday, before settling at $48.90. Despite the markets negative reaction, largely attributable to the lack of a sweetener in the deal or clear exit strategy, global crude oil inventories will grind lower with the new production cut extension (providing overall compliance remains strong). Accordingly, OPEC now has the wind at its back as fuel demand ramps-up ahead of the summer driving season. Further, the world uses roughly 2 million Bbl/d more oil in the second half of the year than the first half of the year, so the impact from the cuts on supply-demand will be pronounced in the second half of 2017. Overall, the combination of seasonal demand growth and the nine month extension should shrink global stockpiles and lead to a higher oil price by year end (likely in the $60 - $65 per barrel range).