Oil prices were firm on Tuesday on the expectation that an OPEC-led production cut would be extended to next March, but analysts said economic slowdown was clouding the mid-term outlook for crude markets. Brent crude futures at 0019 GMT were up 3 cents from their last close at $53.86 per barrel. U.S. West Texas Intermediate (WTI) crude futures were at $51.16, up 3 cents. Both benchmarks have risen over 10 percent from their May lows early this month.
Prices have been lifted by expectations that a pledge by the Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, to cut supplies by 1.8 million barrels per day (bpd) would be extended to March 2018, instead of covering just the first half of this year. OPEC and other participating producers are due to meet in Vienna on May 25 to discuss output policy. “Oil prices are rebounding with stock draws and greater certainty on an extension of the production cuts,” Goldman Sachs said in a note to clients.
“A 9-month extension would normalize OECD inventories by early 2018, in our view, but we see risks for a renewed surplus later next year if OPEC and Russia’s production rises to their expanding capacity and shale grows at an unbridled rate,” the U.S. bank added. At the same time, commodities brokerage Marex Spectron said “spot demand (for oil) remains strong, and we expect it to get even stronger (in coming weeks)”.
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On the macroeconomic front, however, dark clouds appeared on the horizon. “Quarterly growth of real gross domestic product (GDP) in the OECD area decelerated sharply to 0.4 percent in the first quarter of 2017, compared with 0.7 percent in the previous quarter, according to provisional estimates,” the Organisation for Economic Co-operation and Development (OECD) said on Tuesday in a statement.
Of its major members, the OECD said growth slowed markedly in the United Kingdom (0.3 percent, down from 0.7 percent the previous quarter), the United States (0.2 percent growth down from 0.5 percent), and France (0.3 percent, down from 0.5 percent growth). Of the major economies, only Germany and Japan saw accelerated growth, at 0.6 percent and 0.5 percent respectively, up from 0.4 and 0.3 percent previously.
“Our macroeconomic view remains … price-negative, which is likely to affect the medium-term demand for crude oil,” said Marex Spectron.