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OPEC decides to extend production cuts to end of 2018

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The much anticipated two day OPEC meeting concluded last week. As widely expected, OPEC and its allies (outside the OPEC group) decided to maintain oil production cuts to the end of 2018.

A day after the talks in Vienna on Thursday, the decision came showing the consensus agreement between the OPEC members, especially between Saudi Arabia and Russia. Ahead of the decision, the markets were seen to be expecting the Russian reluctance in extending the production cuts.

However, OPEC member nations went a step further which included Nigeria and Libya, who were previously exempt from the production curbs.

Speaking at the event, the Saudi Arabia energy minister Khalid Al-Falih said that the OPEC members were united and stay “shoulder to shoulder.” The Russian energy minister Alexander Novak also echoed this sentiment, saying that Russia was also aligned.

Since the production cuts that were started a year ago, the global inventories in crude oil were consistently falling with prices rising more than $20 a barrel. Despite the difference, the OPEC members showed unanimity at the meeting. The agreement from last week showed that OPEC members will be maintaining the production cuts at 1.8 million barrels a day.

Based on the production cuts, the crude oil stockpiles are expected to return to their five year average without overheating the markets. After the event, some oil watchers said that the production cuts that were implemented previously worked well.

The OPEC’s decision to support a full year of extension was consistent with the internal analysis by the organization, which showed that the stockpiles will be in line with the five year average. This comes amid the fact that Libya and Nigeria both agreed to cut back on production despite the internal strife.

OPEC leaders said that in order to accommodate the additional countries the decision to extend the production cuts by a further 12-month was consistent with the view. Ahead of the OPEC meeting, news reports showed that Russia was seeking assurance on how OPEC would phase out the production cuts. This came as Russian authorities said that the nation needed more clarity as its economic policy was closely tied to oil prices.

This factor led most of the analysts to believe that OPEC would not be able to reach an agreement or that it would end with Saudi Arabia taking most of the production cuts onto itself.

While the OPEC led production cut was a positive development, there were still some big challenges facing the oil cartel. Data from the U.S. showed that there was a large increase in domestic crude oil production for the month of September, approximately 9.48 million barrels a day domestically during the month. This was the highest level since the 70’s.

Crude oil reaction

Crude oil futures were seen muted to the event. WTI Crude oil futures were seen previously rising to the technical resistance level of 57.87 – 57.60 level. However, the momentum was seen to be slowing which signals that prices could be nearing a top. The downside risks for crude oil prices could increase as the support level near 52.25 – 51.80 is expected to be tested in the near term.

However, the bullish bias could be extended in the event that crude oil prices manage to close above the resistance level. This would potentially open up the path for further gains to the upside.

The Stochastics oscillator as seen in the chart shows a strong bearish divergence being formed as crude oil prices are seen trading near the resistance level. In the near term, there is a strong chance that oil prices could slip back to test the support level mentioned.

While OPEC and other oil producing nations remain hopeful that the production cuts will help to stabilize oil prices, the fact remains that U.S. shale oil production will once again rise that could potentially offset the production cuts.

As a result, we expect oil prices to maintain the range below the $60 handle in the near term.

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