Oil prices have been trapped in a tight range in recent weeks as rising USA production has erased the effects of output cuts by the Organization of Petroleum Exporting Countries (Opec) and other countries, including Russian Federation.
"This 550 million barrel-plus inventory build of crude and products that started in 2014 is still very much there", he said. But as it was becoming increasingly obvious that OPEC's cuts are not working fast enough and US shale is roaring back to production growth, investor enthusiasm waned. Eleven non-OPEC countries are participating in the supply cut.
OPEC and other producers are due to discuss an extension during an OPEC meeting on Thursday.
"On the one hand, you have traders who worry about the efficacy of OPEC's oil cuts on inventory levels". This is not expected to result in any decision.
Overall, he sees this outcome as unlikely, with a 15% probability. And "there is some evidence that this is having an effect on global oil prices", so the agreement producers have in place "seems to be working for now", he said.
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However there is a possibility that it may be extended longer than expected (ie into 2018) or the cuts deepened.
There would be the "higher risk of a break down in the agreement to noncompliance", said Ganguli. As no one is counting on US crude production growth being arrested in its tracks or a "demand shock" mopping up the world's surplus, a sizable, measurable and sustained draw in global oil stocks is the obvious answer. That scenario pushed crude oil prices to historic lows a year ago.
"At that point, the Aramco IPO would be done, the Saudis may refuse to put up with noncompliance, the deal expires and then everybody starts producing more, including the Saudis", he said. Its meeting precedes the gathering of OPEC and non-OPEC oil ministers on May 25 to decide whether to extend beyond June 30 their deal to reduce output.
Robust crude oil production from North America and a previous policy from the Organization of Petroleum Exporting Countries to defend a market share with higher output tilted the global market for crude oil heavily toward the supply side.
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