After November’s landmark deal failed to clear a global supply overhang, OPEC announced it would extend cuts in oil output by nine months to March 2018 on Thursday.

The 1.8 million barrel per day supply cut will roll over until the first-quarter of 2018 and the move, which was then ratified by non-OPEC producers, was the base-case scenario for the market.

“We considered various scenarios, from six (months) to nine to 12 and we even considered options for a higher cut… All indications are solid that a nine-month extension is the optimum and should bring us within the five-year average by the end of the year,” said Khalid Al-Falih, Saudi Arabia’s energy and industry oil minister, in a press conference shortly after the announcement.

As traders reacted to the developments, oil prices extended earlier losses shortly after the announcement.

Since this month’s lows were reached on May 4, Brent and WTI futures prices have tracked 13 percent and 14 percent higher respectively.

Even though Crude was capped some way below the $60 a level earmarked by OPEC’s de-facto leader, Saudi Arabia, stockpiles remain high and production from non-participating countries, including the U.S., has been rising.

“It looks like the next six to nine months can be a ‘sweet spot’ for the oil market… That said, things get more complicated beyond the near term,” Konstantinos Venetis, senior economist at research firm TS Lombard, said.

“OPEC’s action should best be viewed as a defensive supply ‘taper’ in the hope of better demand,” Venetis added.

Saudi Arabia’s delegate suggested reaching an agreement to curtail oil production by a further nine months appeared the “safe bet” and explained that all options had been considered ahead of the announcement – including deeper cuts and a possible six-month extension.

A nine-month extension would be woefully insignificant, argued Johannes Benigni, chairman of JBC Energy Group, shortly before the meeting. He stressed that demand would not be balanced until at least the end of 2019 and argued market observers were being too optimistic.

“OPEC now giving a signal they’re going to 2018 is great but you will see they have to roll on with their cuts. They will have to go to the end of next year and beyond,” said Benigni while talking to the media.

Benigni said that a key factor in establishing price levels would be the reaction of U.S. shale producers. “This supply response is a little bit of a risk for OPEC so if prices go really up it may not be in their interest,” he added.

the era of falling production costs has now been replaced by stability but could soon turn to a climate of rising costs, says the JBC chairman and adds that the U.S. shale market is currently in the process of rebalancing.

(Adapted from CNBC)

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