OPEC deal to cut oil production should be extended by late 2018, Thomas Pugh, commodities economist at British economic research and consulting company Capital Economics told Trend Sept.1.
Earlier, Saudi Arabia and Russia proposed to extend the OPEC deal until June 2018.
“I don’t think extending it to June will be enough to do much. They would have to extend it until the end of 2018 in order to make any sort of difference,” said the expert.
Pugh believes that even then an extension of the deal could just encourage US shale production to grow by even more.
“I’m also not convinced that the deal will be extended as countries like Iraq are still not complying,” he added.
He pointed out that it’s unlikely to have a long term effect on the market unless there is significant damage to oil production or refineries.
“We expect it to put some short-term downward pressure on prices, especially on West Texas Intermediate (WTI). It will also put upward pressure on gasoline prices, driving crack spreads higher,” said Pugh. “Not only will OPEC have to extend its deal forever it will have to keep deepening the cuts, eventually the pain would be too much and the group will return to full production. This is exactly what happened in the 70’s and is a key reason why we are skeptical that OPEC will continue to extend the deal.”
On May 25, OPEC member countries and non-OPEC parties, Azerbaijan, Kingdom of Bahrain, Brunei Darussalam, Kazakhstan, Malaysia, Mexico, Sultanate of Oman, the Russian Federation, Republic of Sudan, and the Republic of South Sudan agreed to extend the production adjustments for a further period of nine months, with effect from July 1, 2017.
The reductions will be on the same terms as those agreed in November.
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