Oil prices drop as market remains bloated despite OPEC efforts

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For 2018, OPEC net oil export revenues are forecast to be $595 billion (nominal), with an increase in forecast crude oil prices and higher OPEC production and exports contributing to the rise in overall earnings. Meanwhile, Algeria claimed an extension to Opec's production curbs would be backed by "most" of its fellow Opec members.

The premium of the December 2018 contract versus the December 2017 contract has widened since February. Several non-members, including Russian Federation, agreed in December to contribute a combined 600,000 barrels a day of output reductions.

Crude oil prices came under pressure late Tuesday after the American Petroleum Institute reported a slight build in domestic crude oil inventories. To add to this, the global rig count, both oil as well as gas, has been growing gradually since June 2016.

Martijn Rats of Morgan Stanley (Xetra: 885836 - news) said the U.S. rig count has doubled in a year, making it the "strongest recovery in the last 30 years". This year, OPEC is working to counter the glut through managed declines. The US, a non-OPEC member, is now dictating the direction of the market. However, it will be complicated not just by rising production in Libya but also by shale producers in the United States and the rising crude oil inventory in the world's biggest economy. By the time Opec reversed course in November 2016, sending oil prices up as much as 10%, shale had already gained ground. This weaker-than-expected response to the announcement could be driven by the market perception that it would be hard to get all the parties to concur to the same terms of the deal. As Rachlin says, "We have friends in high places today".

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With such an extension already priced in, a real surprise could come if OPEC chose to extend for longer, deepen output cuts or restrict exports.

Oil futures rose on Friday to the highest in almost a month on growing optimism that big producing countries will extend output cuts to curb a persistent glut in crude, with key benchmarks heading for a second week of gains.

"I think the cuts are enough to stabilize the market". This causes the oil supplies to expand, pulling down the oil prices back into the goldilocks range.

While the extension is all but certain, there are still doubts that it will achieve its stated goal of bringing the worldwide oil market back to balance-in other words propping up prices enough to allow for investment in new production in Middle Eastern and other producers, whose hands are now tied by budget deficits.

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