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Opec, cornered

The group has no real option but to roll over its deal on 25 May. Prices should rise in the second half of the year—and then the policy debate will start again

All signals point to an extension of the Opec cuts on 25 May. Gulf producers are on board, above all Saudi Arabia, whose oil minister Khalid al-Falih thinks the policy should continue until global oil stocks are back within historical ranges. Venezuela will be happy to roll over the deal—the cuts make a virtue of its steady output decline. Compliance has been surprisingly high, showing a group-wide commitment.

Unless Opec members are ready for more economic pain the extension should be baked into forecasts. The cuts haven't restored the $60-a-barrel-plus prices Saudi Arabia is thought to seek. But they prevented a slide back into the $40s or even $30s-basement prices that might have been reached without last year's deal.

And Opec doesn't want to mess with that situation. Saudi Arabia was shocked by the sell-off in March after Falih hinted that he was losing patience with "free riders". Since then, he has done everything to cajole the market to buy the extension. Alongside refineries' return from maintenance and the onset of the US driving season, the extension should yield steady inventory draws. All this—together with an improving global economic backdrop, according to the IMF—should help strengthen prices in the second half of the year. Citi, a bank, expects Brent to hit $60/b in Q3 and for the Opec cuts to "buttress a rally" towards $65/b by year end.

But the IEA trimmed its demand outlook for 2017 again in March. And tight oil's response to $55/b oil has been far more aggressive than predicted, not least by Opec-at $60-65/b, the supply onslaught would surely overwhelm the price. Russia may join round two of the cuts, but its companies are all planning year-on-year output growth.

Most analysis now points to a drawing down of stored oil but the data are choppy On 19 April, the Energy Information Administration's weekly numbers showed a crude draw of just 1m b/d, well below expectations, and a rise in gasoline stocks. The news took almost 4% off oil prices.

Although Saudi Arabia is ready to extend the cuts, it does not want to keep restraining output indefinitely. As oil prices rise, Gulf producers will itch to resume their maximalist plans again. For all the need to shore up fiscal balances with higher prices, Gulf executives see a more compelling logic in volume.

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