Oil overhang points to need for extended OPEC output cuts

An OPEC-led production cut may well be accelerating a drawdown in global oil stocks that began last year, but implementing the reduction for just six months means the producer group will fall short of achieving its objective of rebalancing the market.

The Organization of the Petroleum Exporting Countries and non-OPEC producers in December reached their first deal since 2001 to curtail oil output jointly, by around 1.8 million barrels per day.

In the months leading up to the deal and after it was struck, OPEC ministers said tackling an overhang in crude and oil product inventories that has depressed oil prices for over two years was one of their main objectives.

So far, OPEC kingpin Saudi Arabia, which is contributing the biggest chunk of the cut, has said the deal does not need to be extended beyond a six-month period.

This contrasts with price hawk Iran, whose oil minister Bijan Zanganeh said OPEC should cut production further in the second half of 2017. Under the deal, Iran was allowed to boost output slightly above October levels.

The International Energy Agency (IEA) said inventories of crude, natural gas liquids and oil products in member countries of the Organisation for Economic Cooperation and Development (OECD) remained 286 million barrels above the five-year average of around 2.7 billion barrels. This is despite a draw of 800,000 bpd in the fourth quarter of 2016.