Despite an OPEC decision to extend output cuts by nine months to March 2018 by rolling over a six-month deal to remove 1.8 million barrels a day from the market, oil prices fell by almost 4% on Thursday. Brent crude fell $2.60 to $51.36 a barrel on Thursday and was trading at $51.47 on Friday morning while the West Texas Intermediate slipped $2.58 to $48.78 a barrel and had reached $48.82 on Friday.
The cuts, agreed at a meeting of OPEC and other major producers led by Russia in Vienna on Thursday, were aimed at tightening the market and support the plummeting prices. Opec countries and eleven other oil-producing nations, including Russia, had first agreed to reduce production last December in an effort to boost flagging prices.
“We considered various scenarios from six to nine to twelve 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,” said Saudi Arabia’s energy minister, Khalid al-Falih, who co-chaired the meeting with his Russian counterpart Alexander Novak.
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However, investors in the financial markets weren’t much impressed by this output cut agreement. A continuation of the earlier level of cuts was perhaps the minimum they were expecting. Some investors expected that the production cuts might be deepened and were disappointed when the OPEC-led group simply extended the existing cuts deal.
However, OPEC and the other countries involved might not have agreed to cut production further as that could have proved beneficial for the American shale oil industry. The American shale producers would have been the unintended beneficiaries of deeper production cuts even if such cuts would have succeeded in the OPEC-led group’s objective of getting commercial stocks of crude oil down. A deeper production cut could have created a wider than needed supply gap in the market that shale producers may have stepped into and higher prices due to this reduced supply would have made them even more profitable.