The oil market is "moving in the right direction," a monitoring committee overseeing the OPEC/non-OPEC production cut agreement said Thursday, with the reduction in supplies forcing a substantial drawdown in commercial inventories and floating storage.
Nevertheless, an extension to the cuts, which are set to expire in March 2018, is still on the table, the committee said.
Sources have told S&P Global Platts that OPEC kingpin Saudi Arabia and Russia, the world's largest producer, have discussed extending the deal for an additional three months through June, to bolster trader confidence that the 24 participants in the cuts will not flood the market the minute the pact expires.
Such an extension will likely be on the agenda for OPEC's next full ministerial meeting November 30, the sources said.
While oil prices have been bolstered this summer on data indicating robust demand and declining inventories, especially in the US, "as we enter the shoulder season and as market sentiment has the potential to sour again, it's best to remove the prospect of a no-extension decision from people's minds," said Michael Cohen, head of energy commodities analysis for Barclays.
He added that if the cuts are allowed to expire in March, many projections indicate a "severe uptick" in the market surplus going into the spring.
Saudi and Russia officials could not immediately be reached for comment.
The committee, composed of Kuwait, Russia, Venezuela, Algeria and Oman, said in a statement distributed by OPEC that it "will continue to monitor other factors in the oil market and their influence on the ongoing market rebalancing process."
"All options, including the possible extension of the declaration of cooperation beyond [March], are left open to ensure that all efforts are made to rebalance the market for the benefit of all," it said.
Gary Ross, global head of oil at PIRA Energy, a unit of Platts, said he expects a three-month extension to be the next step, with a view towards potentially continuing the cuts "into perpetuity."
The deal, which began January 1 and calls on the 14 OPEC countries and 10 non-OPEC producers led by Russia to cut a combined 1.8 million b/d in supplies, has already been extended once. At their meeting in Vienna in May, the participants agreed to continue the cuts past their scheduled June expiry for nine months through March.
"An extension in November I think is the minimum action they will take," said Joe McMonigle, senior energy policy analyst at Hedgeye Potomac Research. "The market will be looking for stronger action, like deeper cuts."
TALKS ON COMPLIANCE
The monitoring committee, which pegged compliance with the cuts among the 24 countries at 94%, is scheduled to meet again in Vienna on September 22.
Compliance, however, has not been achieved equally, with a few members, notably Saudi Arabia, overcomplying with their cut commitment throughout the deal so far making up for lagging conformity by other countries.
The committee's technical staff held two meetings earlier this month to call the less compliant countries to account, including the UAE, which hosted one of the meetings.
Iraq, which has been one of the least compliant members, has also been the focus of OPEC pressure. The country was reluctant to join the deal in the first place, seeking an exemption as it said it needed revenue to fund its war against the Islamic State militant group.
Saudi officials, including energy minister Khalid al-Falih, who has warned that he will not tolerate "free riders" on the deal, have held high level meetings with counterparts from Iraq in recent weeks to discuss a range of issues, including the cut agreement.
Iraq produced 4.47 million b/d in July, according to OPEC's latest monthly oil market report, which tracks independent estimates, including from Platts. That is far above its quota under the deal of 4.35 million b/d.
"I think the big Saudi diplomatic/economic outreach to Iraq keeps them on side for the June extension," said Helima Croft, global head of commodity strategy for RBC Capital Markets.
For its September 22 meeting, the monitoring committee said it would invite representatives from Libya and Nigeria to explain their production outlooks.
The two countries, which were exempt from the cuts as they dealt with internal unrest, have ramped up production significantly in the last few months as their security situations have improved.
Nigeria has said it will participate in the cuts once its production stabilizes at 1.8 million b/d, while Libya has indicated a production target of 1.25 million b/d.
Libyan production stood at 1 million b/d in July, a 450,000 b/d rise from April, according to OPEC's latest monthly oil market report, while Nigeria's was 1.75 million b/d, a 240,000 b/d rise from April. - Source: Platts -