With low oil prices plaguing the energy industry for the past couple of years, a new move to cut production levels has not received the market reaction many had expected.
At a meeting this week of members of oil producer cartel Organization for Petroleum Exporting Countries (OPEC) and non-members, it was decided to extend production cuts for a further nine months.
OPEC had previously cut production levels late last year as part of a concerted bid to force prices higher.
“The 14 OPEC member countries and 10 participating non-OPEC producing countries underscored the importance of continuing efforts to help stabilise the oil market, in the interests of all oil producers and consumers,” the cartel noted.
The industry has come under pressure in recent years as global growth has slowed and new reserves from the US shale oil sector have impacted prices.
Indeed, prices remain stressed: over three years the Bloomberg Brent Crude Sub index is down by 59.38 per cent, while the West Texas Intermediate (WTI) index has fallen further, dropping 64.02 per cent.
Despite some periods of strong performance, most notably ahead of the previous OPEC meeting and following Donald Trump’s election victory, the index has failed to make significant gains.
Performance of oil indices over 1yr
Source: FE Analytics
As the chart above shows, the Bloomberg Brent Crude Sub index is up by 3.77 per cent over the past year, while the WTI index has fallen by 2.59 per cent.
Neil Wilson, senior market analyst at ETX Capital, said a nine-month extension to production cuts wasn’t enough to lift oil prices.
He said: “Having said they’d do whatever it takes, OPEC is looking a bit toothless now.”
Wilson said instead of deepening cuts, “they are continuing to tinker at the margins” and added that no new non-OPEC members had joined in cutting production. 
A fall in oil prices following the OPEC meeting demonstrated the market’s ongoing term concerns.
Wilson said: “The fall, in spite of the extension, is a sign that the recent rally for oil was, in part, built on pretty sandy foundations and the hopes that OPEC would do more cutting and faster.
“They seem to be hoping that global demand will pick up but it’s hard to see enough of this happening to warrant lifting crude out of its current range.
“As previously noted, faced with kind of glut and the scale of the market, the cartel would be better off cutting a lot deeper but for less time than trying to prolong fairly timid cuts.”
Nizam Hamid, ETF strategist at WisdomTree Europe, said: “OPEC’s long-awaited meeting has disappointed investors, with oil prices giving up recent gains after members dashed expectations of deeper cuts to production and merely reiterated the status quo.
“The falls may provide a buying opportunity for investors who believe in the long-term story for oil, but they also highlight the environment of heightened volatility which the commodity is facing.”
He added: “With supply side dynamics undergoing a fundamental shift thanks to the impact of US shale, only decisive action from OPEC will boost prices from current levels, and so far investors have not been satisfied that OPEC is tackling the issue aggressively enough.”
Richard Robinson, manager of the four crown-rated Ashburton Global Energy fund, said the production cut had been expected and many investors remained ambivalent towards the cuts.
Robinson said ambivalence had grown as a result of perceived ineffectiveness of initial cuts to production in reducing inventories, but warned it could be a “costly error” for those positioned for further weakness.
The manager said that OPEC producers may have to begin drawing down on reduced production to replenish depleted inventories during the latter half of 2017 and into 2018.
He added: “The extension of the cuts could therefore herald a second half of 2017, where we see an accelerated draw in OECD [Organisation for Economic Cooperation and Development] inventories, moving us close to normalised levels by the end of the year.
“The combination of normalised inventories, tight supply and a market that is historically very short of energy, could set us up for a strong reaction of the oil price as the year progresses.”
As oil prices continuing to trade at low levels over a longer period, listed companies operating in the sector have struggled to maintain dividends and seen their share prices come under pressure.
The FTSE All Share Oil & Gas index has risen by just 7.76 per cent compared with a 26.21 per cent rise in the main index, although the specialist index has outperformed the FTSE All Share index over one year, up by 34.35 per cent versus 23.97 per cent.
“I think that even at today’s oil price – Shell, at $50 per barrel, has produced three quarters in a row where they have cash-covered their dividend,” he noted recently.
“That is something they didn’t do at $100 oil because they were spending very extensively on exploration and Opex [operating expenditure] costs were incredibly high.”
Indeed, UK equity income fund staples BP and Royal Dutch Shell have performed strongly over the past year despite the challenging oil price environment.
Performance of BP & Royal Dutch Shell vs index over 1yr
Source: FE Analytics
Both stocks have returned in excess of 35 per cent during the past 12 months, as strong support for the FTSE 100 has continued to push the blue-chip index higher since the EU referendum in the UK.
Looking ahead, some analysts remain less than confident that oil prices will return to levels of above $100 per barrel for some time.
Michael Baxter, economics commentator for The Share Centre, said: “The oil price seems to be trading in a corridor of roughly between $50 and $55 a barrel, plus or minus a couple of dollars either way.
“Fracking is the key factor at play here although, thanks to greater use of renewables and fuel efficiency, demand is not at the kind of levels that analysts were projecting a few years ago.”
He said: “Whatever OPEC decides to do, it seems that its ability to influence the oil price is limited. It would be unfair to describe OPEC as irrelevant, it is merely mostly irrelevant.
“It may decide to cut this, or not do that, but the oil price remains in a range that is roughly half the price of three years ago.”
He added: “The oil cycle will turn eventually, but the price may not return to the $100 a barrel ballpark for several years, quite possibly not until the next decade.”