Organization of the Petroleum Exporting Countries (Opec) and several non-Opec countries have finalised plans to extend production cuts for an additional nine months (through Q1 2018) without specifically articulating an exit strategy, said an expert.

The extension comes with a few caveats, the most important being the ability to adjust production quotas as needed, according to leading British multinational bank Barclays.

The Joint Market Monitoring Committee (JMMC) will play the role of failsafe over the coming months. Its purpose has evolved to one that can actually recommend new production levels in the event that prices get too high or too low or other surprises upset the market, stated a commodity research report from Barclays.

During the recent press conference, Saudi Energy Minister Khalid Al Falih expressed confidence in the plan to extend the cuts through Q1 2018, saying that inventories would fall below the five-year average before year-end, but cuts should remain in place during the first quarter of 2018 due to seasonal demand weakness.

Barclays Research said as per its calculations, if half of the supply deficit was applied to OECD stocks, the inventory level was unlikely to touch the five-year average by this timeframe.  

"Opec’s decision is in line with our consensus views; however, price action likely reflects, first, that market participants bought the rumour over the past two weeks and sold the news today," it stated.

"Based on our conversations, some market participants may have expected either a deeper cut, a longer one, inclusion of more countries, or other such icing on the cake. Second, the move in the 2018 contract was also sharp, possibly reflecting producer selling that may have occurred as they fret over the state of fundamentals next year. In our view, today’s dip is likely short lived, and we continue to believe that inventory draws in the coming summer months will be supportive of prices," said Barclays Research.

At the press conference, Al Falih expressed certainty about improving market conditions, but acknowledged that there were too many variables that were out of Opec’s control.

During his address, he cited stronger consumption in India and China, declining production in many countries, and falling floating inventories.

In particular, when asked about tight oil, arguably the most disruptive factor in the oil markets today, Al Falih said things were "certainly not certain." The Saudi minister went on further to discuss US cost inflation and other tight oil dynamics.

"If Opec is taken at its word and maintains 100 per cent compliance over the summer, the balances would likely be 500-600  kb/d tighter than what we currently assume, and this would coincide with an inventory draw that presents upside risk to our $56 per barrel forecast in the second half of this year and the first quarter of 2018 and downside risk to our forecast in the remainder of 2018 assuming no further changes to Opec output," said Barclays in its report.

"For now, we maintain our forecast, as other prevailing factors would likely offset further oil price appreciation, such as accelerated US tight oil growth and demand destruction that would occur as prices increase," it stated.

"We are already calling for US liquids production to grow 1.2 mb/d from Q4 2016 to Q4 2017 and an additional 1 mbd from Q4 2017 to Q4 2018. With this agreement, there is scope for output to move even higher over the next 18 months," it added.-TradeArabia News Service