Immediate reaction to OPEC cuts extension mixed

Immediate reaction is mixed on the outlook for oil prices after the 172nd meeting of the Conference of the Organization of Petroleum Exporting Countries decided to extend production cuts for a further nine months from July 1.

Opinion is divided on whether the price of oil will fall, rise or remain stable. Richard Robinson, manager of the Ashburton Global Energy Fund, says the extension could cause an accelerated reduction in OECD inventories.

The combination of normalised inventories, tight supply and a market that is historically very short of energy, could set the scene for a strong reaction of the oil price as the year progresses, he believes.

The only way is up

The most basic law of applied economics indicates that any increase in demand at a time of reduced supply will be reflected in the price. By this reading, the only way is up. Or, at least, not down.

Andrew Slaughter, executive director at the Deloitte Center for Energy Solutions, is widely quoted saying seasonal demand growth and the extension of the cuts will reduce global stocks. This will probably set a new floor for crude oil prices in the low $50 per barrel range.

But Michael Baxter, economics spokesmen for The Share Centre, a UK retail stockbroker, could almost be heard shrugging his shoulders as he delivered his verdict.

Mostly irrelevant

"It would be unfair to describe OPEC as irrelevant, it is merely mostly irrelevant,” he says. “It may decide to cut this, or not do that, but the oil price remains in a range that is roughly half the price of three years ago.”

“Fracking has changed the dynamics of supply, reducing the importance of OPEC. The oil cycle will turn upwards eventually, but maybe not before this decade is out."

There is remarkably little evidence that market participants have positioned their portfolios for the effects of an extension, says Ashburton's Richard Robinson. Open interest from money manager net longs is at its lowest level since records began.

Misconstrued ambivalence

And shorts for Brent and West Texas Intermediate (WTI) are within touching distance of their all-time highs. This highlights a potentially misconstrued ambivalence to the effectiveness of the cuts, he says.

This ambivalence comes as a result of the perceived ineffectiveness of the initial round of cuts in reducing crude inventories. Extrapolating the effects of the first six months to the next nine might be a costly error for those caught short, he cautions.