OPEC and non-member oil producers are on track to agree on extending production cuts at their meeting on Thursday, with Saudi Arabia saying most participants agree that the output deal needs to be renewed, Reuters reported on Sunday.
Saudi energy minister Khalid Al-Falih said that a nine-month extension to supply cuts until March should bring down inventories to their five-year average.
“We believe that continuation with the same level of cuts, plus eventually adding one or two small producers, if they wish to join, will be more than adequate to bring the five-year balance to where they need to be by the end of the first quarter 2018,” he said.
OPEC and 11 non-member oil producers led by Russia agreed in December last year to trim output by a combined 1.8 million barrels a day (mbd) for six months, starting Jan. 1.
Oil prices have gained following the deal, but high stocks and growing output from producers not part of the pact, like the US, have weighed on prices.
While there has been a decline in inventories held at sea and in producer nations, they remain high in regions like Asia and the US.
According to the International Energy Agency’s (IEA) latest monthly report, OECD commercial stocks stood at 3.025 billion barrels at the end of March.
Preliminary data suggests inventories increased in April, the IEA added.
Higher supply is also expected going forward from countries outside of OPEC. The producer group expects an increase of nearly 1 mbd from non-OPEC producers, led mainly by the US, it said in its monthly report in May.
However, high seasonal demand for oil in the summer, in addition to strong levels of compliance with output cuts, will help reduce stocks and stabilize the market, Al-Falih said.
Last week, an OPEC panel mulled the option of deepening and extending the deal to reduce output, it was reported.
While a larger cut by existing participants is unlikely, it could still be considered and the size of the output cuts could exceed 1.8 mbd if more non-OPEC nations join the deal, sources told Reuters.
“If OPEC and its partners keep their cuts in place until Q1 2018 but then resume production growth once the deal expires, the market will certainly move back into surplus of around 0.5 mbd for the year,” Dubai-based Emirates NBD said in a report on Monday.
“Transparent commercial inventories will still remain substantially above their five-year average even if demand accelerates beyond our current expectation. At that point OPEC and its partners will need to face the uncomfortable decision of cutting further or prioritizing access to markets through greater output.”
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