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Oversupply fears push oil prices to five-month lows

Saudi Arabia seen as a driver of OPEC's production cut deal

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Fears of oversupply pushed oil prices to five-month lows on May 5 despite signals that Russia is ready to join the Organization of Petroleum Exporting Countries in extending supply cuts.

US WTI crude oil futures fell more than 3% in early trading to less than $44 a barrel, the lowest since November 14, Reuters reported. It fell 4% on May 4. Benchmark Brent also fell 3% to below $47, which is its lowest since November, when OPEC agreed to cut output.

Traders are worried that OPEC and other countries will not succeed to further cut output at their next meeting on May 25. Russia, one of the non-OPEC countries to sign up to the cuts, has signaled that Moscow is ready to extend the production cut agreement with the oil cartel.

The 10 Organization of the Petroleum Exporting Countries (OPEC) members’ crude output stayed unchanged in April at 31.85 million barrels per day compared to March, a S&P Global Platts survey released on May 5 showed. OPEC is still showing high compliance with its production cut agreement, as increases in Angola and Nigeria were offset by declines from Libya and Iraq.

“OPEC members can go into their May 25 meeting in Vienna feeling good about their compliance levels,” OPEC Specialist, S&P Global Platts Herman Wang said.

“Even countries, like Iraq and the UAE, which have come in for some criticism over their production levels, moved closer to compliance in April. But an extension to the production cut agreement is far from a done deal, with many details to be negotiated, including cut levels, exemptions and duration, amid an increasingly skeptical market. OPEC still has much to discuss.”

OPEC’s largest producer Saudi Arabia averaged 9.97 million barrels per day in April, according to the survey, below its quota under the deal of 10.058 million barrels per day. The kingdom is seen as a driver of OPEC’s production cut deal, with Saudi Energy Minister Khalid al-Falih telling an April conference in Abu Dhabi there appeared to be a growing consensus on a need to extend the cuts, as global inventories remain stubbornly high.

Iraq, which has faced criticism for not fully complying with its required cut, produced 4.36 million barrels per day in April, the survey found, as the Taq Taq field in the Kurdistan Region of the country has seen output decline, while exports from Iraq’s Persian Gulf terminal also fell during the month.

Iran, which is allowed a slight output increase under the deal, held production steady in April at 3.77 million barrels per day, the survey found, below its quota of 3.797 million barrels per day. The UAE, also under pressure from fellow OPEC members to come into compliance with its quota, lowered production slightly to 2.84 million barrels per day, down 10,000 barrels per day from March, the survey found.

In Libya, a blockade of a pipeline from the Sharara field to the Zawiya terminal in the country’s west by a militia knocked production down significantly in the month to 550,000 barrels per day.

Impacted heavily by militancy over the last year, Nigeria and Libya are exempt from the production deal, which led some OPEC watchers, according to Platts, to doubt the effectiveness of the agreement, if production from the two countries were to recover and offset any cuts.

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Co-founder / Director of Energy & Climate Policy and Security at NE Global Media

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