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OPEC cuts not enough for investors

May 26, 2017

Energy firms take a hit after OPEC members agree to less than expected curbs on future oil production. Traders were looking for deeper and more long-term cuts to help stabilize the oil market.

Österreich OPEC Logo
Image: picture-alliance/dpa/B. Gindl

Investors were disappointed that OPEC and allied producers decided not to prolong existing production cuts past the first quarter of 2018. The agreement at a meeting in Vienna on Thursday to keep in place a reduction of 1.8 million barrels per day was not enough for traders and immediately sent crude prices plunging almost five percent, which in turn dragged energy firms lower.

There had been hopes that the extension would be 12 months or that the cuts would be even deeper. This optimism had driven crude futures higher in recent days, which only heightened the disappointment of investors.

The aftermath

Saudi-Arabien Erdölraffinerie
Looking to stabilize the oil market, the oil production ceiling for OPEC is set at 32.5 million barrels a day.Image: picture-alliance/dpa

A day after OPEC announced its decision, crude prices were still on the defensive prompting a general move away from riskier assets.

Clawing back some of Thursday's losses, Brent crude futures were at $51.80 (46.20 euros) per barrel in early morning European trading, up 0.66 percent from their last close.

However, these futures were still set to end Friday with a weekly loss of more than 3 percent.

US crude prices were flat at $48.88 on Friday, after losing 4.8 percent overnight, and were set to end the week 2.8 percent lower.

"Clearly what was announced has not been enough," David de Garis, director of economics at National Australia Bank, said in a commentary.

A vision of the future

The decision by the oil producers also pushed down Asian shares. MSCI's broadest index of Asia-Pacific shares outside Japan, which closed at a two-year high on Thursday, fell 0.2 percent, shrinking its weekly gain to 1.45 percent. Overall Japan's Nikkei closed 0.6 percent lower.

On the brighter side Hong Kong-listed airline stocks rose sharply on expectations that a slide in oil prices would reduce carriers' fuel cost in the near future.

But David Elmes, professor at Warwick Business School and head of the Global Energy Research Network, thinks that the future of energy will not be in the production of more oil, but rather on the consumer side. He is betting that the focus will be on using energy in smarter ways and on more efficient and better vehicles.

"Prices today and in the near term are absolutely crucial for the economic stability of many oil producing nations, not just OPEC. And we'll be using some oil and gas for decades into the future. But this shows a longer term trend that we'll use only the most affordable oil and gas, making investments in other sources that are as affordable, or in using energy more efficiently,” according to Elmes.

tr/uhe (AFP, Reuters)