In the battle of global glut of crude after seeing prices halve and revenues drop sharply in the past three years, Organisation of the Petroleum Exporting Countries OPEC and non-members led by Russia decided on Thursday to extend cuts in oil output by nine months to March 2018.
OPEC has taken it upon itself to bring stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion.
So far, OPEC’s cuts have helped to push oil back above $50 a barrel this year, giving a fiscal boost to producers, many of which rely heavily on energy revenues and have had to burn through foreign-currency reserves to plug holes in their budgets.
The drop in oil prices began in 2014, forcing Russia and Saudi Arabia to tighten their belts and led to unrest in some producing countries including Venezuela and Nigeria.
The price rise this year has spurred growth in the US shale industry, which is not participating in the output deal, thus slowing the market’s rebalancing with global crude stocks still near record highs.
The nine-month extension was largely expected by the market. Brent crude was down nearly 4 percent at around $51 per barrel on disappointment OPEC would not deepen the cuts or extend them by as long as 12 months.
In December, the Organisation of the Petroleum Exporting Countries agreed its first production curbs in a decade and the first joint cuts with non-OPEC producer nations, led by Russia, in 15 years.
The two sides decided to remove about 1.8 million barrels per day (bpd) from the market in the first half of 2017 – equal to 2 percent of global production, taking October 2016 as the baseline month for reductions.
On Thursday, OPEC agreed to keep its own cuts of around 1.2 million bpd in place for nine months, Kuwaiti Oil Minister Essam al-Marzouq said.
OPEC and non-OPEC delegates said joint cuts with non-OPEC were agreed at around 1.8 million bpd, which would see non-OPEC producers again contributing a reduction of under 600,000 bpd.
Notwithstanding the cut, OPEC kept exports fairly stable in the first half of 2017 as its members sold oil from stocks.
OPEC first suggested extending cuts by six months, but later proposed to prolong them by nine months. Russia offered an unusually long duration of 12 months.
“There have been suggestions of deeper cuts, many member countries have indicated flexibility but … that won’t be necessary,” Saudi Energy Minister Khalid al-Falih said before the meeting.
OPEC produces a third of the world’s oil. Its production reduction of 1.2 million bpd was made based on October 2016 output of around 31 million bpd, excluding Nigeria and Libya.
Falih said OPEC members Nigeria and Libya would still be excluded from cuts as their output remained curbed by unrest.
He added that Saudi oil exports would reduce even further from June, thus helping to speed up market rebalancing.
OPEC sources have said the Thursday meeting will highlight a need for long-term cooperation with non-OPEC producers to help stabilize prices.
The group could also send a message to the market that it will seek to curtail its oil exports.
“Russia has an upcoming election and Saudis have the Aramco share listing next year so they will indeed do whatever it takes to support oil prices,” said Gary Ross, head of global oil at PIRA Energy, a unit of S&P Global Platts.
“We have seen a substantial drawdown in inventories that will be accelerated,” Falih said.”Then, the fourth quarter will get us to where we want.”
OPEC also faces the dilemma of not pushing oil prices too high because doing so would further spur shale production in the United States, the world’s top oil consumer, which now rivals Saudi Arabia and Russia as the world’s biggest producer.