OPEC+ likely to extend production cuts in June

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LONDON, May 3 (Reuters) - Saudi Arabia and its allies in OPEC+ are likely to keep oil production unchanged for a further three months when ministers review output allocations on June 1.

The tightening of petroleum supplies and depletion of inventories widely anticipated at the start of the year has failed to materialise so far.

If OPEC+ (Organization of the Petroleum Exporting Countries and allies) officials had hoped to increase production into a tightening market characterized by rising oil prices they are likely to be frustrated.

Crude stocks, futures prices and calendar spreads are all at similar levels to a year ago, making a significant increase in output unlikely.

The group may nonetheless decide it needs to rescind some of last year’s output cuts to pre-empt a further rise in production from the United States, Canada, Brazil and Guyana and avoid conceding more market share.

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Front-month Brent futures have averaged $84 per barrel so far in May putting them exactly in line with the average since the start of the century after adjusting for inflation.

Prices have risen by just $6 per barrel, or 7%, compared with a year ago when the group was planning production cuts to boost them.

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Despite an increase in tensions across the Middle East, causing a temporary rise in the war risk price premium, there has been no actual impact on oil supplies, and the premium has largely faded.

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Diplomatic efforts have contained conflict between Iran and Israel, with no impact on either oil production or tanker exports from the Persian Gulf.

Tanker traffic has been re-routed from the Red Sea and the Gulf of Aden around the Cape of Good Hope to avoid drone and missile attacks from Houthi fighters based in Yemen.

In the United States, commercial crude inventories are at almost the same level as this time last year and close to the prior 10-year seasonal average.

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Senior OPEC ministers and officials stress the group’s policy is to be proactive and forward-looking.

That may be true when it comes to reducing production to avert an increase in excess inventories and stabilise prices.

When it comes to increasing production, however, the group has normally waited until stocks have fallen and prices have already risen significantly.

In this instance, inventories and prices close to the long-term average imply ministers are likely to decide to keep output unchanged, based on their behaviour in the past.

In the last decade, OPEC+ production cuts have propped up prices and supported continued growth in output from outside the group especially in the western hemisphere.

Some members of the organisation have expressed concerns about the loss of market share and pushed to increase production.

So far, Saudi Arabia has led OPEC+ in cutting production to reduce stocks and boost prices at the expense of volumes.

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