The Organization of the Petroleum Exporting Countries (OPEC) on Thursday agreed to extend until March 2018 an oil output cut agreement put in place for six months effective from 1 January and will expire in June, Iranian media reported.
Goldman Sachs warned that the biggest risk to oil markets was what would happen next year, at the end of the OPEC-led production cut.
While the agreement essentially spelled out a continuation of the previous production cuts for another nine months, the lack of an option to continue cuts into 2018 is one of the concerns brought up by analysts assessing the deal. However, the extent of production cut is retained at 1.8 billion barrels per day. Their output already is partially offsetting the cuts, and even more USA companies are poised to return if prices rise further.
Oil prices rebounded to rise more than 1 percent on Friday, but ended the week almost 3 percent lower after an OPEC-led decision to extend production curbs did not go as far as many investors had hoped.
Clawing back some of Thursday's losses, global benchmark Brent futures LCOc1 were up 28 cents at $51.74 a barrel at 0837 GMT. Crude oil prices were trending higher ahead of Thursday's meeting in Vienna and the USA shale oil sector was responding, reaching 9.3 million barrels per day last week, up 5.8 percent year-on-year.
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The problem for OPEC is that while crude sits substantially below the highs of around $100 a barrel reached in 2014, it is high enough to bring back into the market USA producers who eased back as prices tumbled past year.
Even a decision to maintain oil cuts thus is likely to only kick the can down the road from Thursday's meeting until OPEC ministers convene again late this year. United States shale production requires a higher price to be profitable. The consultant group said it expects total USA and Canadian oil production will rise by nearly as much as was sidelined by OPEC and its non-OPEC partners.
"Prices today and in the near term are absolutely crucial for the economic stability of many oil producing nations, not just OPEC". Indeed, any effort by the group to support prices through production cuts runs the risk of being undermined by a surge in U.S. shale production.
Investment bank Goldman Sachs said Opec and Russian Federation needed to cut production until stockpiles returned to normal. And to restore investment attractiveness of the sector in general in order to be able to fulfill future needs and to give more product ability to the market. That's because USA shale oil producers have taken advantage of the uptick in prices since past year to ramp up production.
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