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Initial performance of OPEC deal will set the tone

Feb 10. 2017
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AS JANUARY drew to a close, the key question on the minds of oil market participants was: how well did OPEC adhere to its quotas?

OPEC and non-OPEC producers met more than half way into their first month of the new supply-cut policy in Vienna, where they put forth solid reassurances of their commitment to the output curbs.

At the meeting, Saudi oil minister Khalid al-Falih said he was “positive” that non-OPEC producers were taking part in the cuts, while Russian energy minister Alexander Novak said his expectations had been “exceeded”.

“Everybody has declared their full commitment. For all I know, and I still hope we will see evidence in February, we are going to get 100 per cent compliance, possibly more,” Falih had told journalists after the meeting.

Falih said there was evidence OPEC and non-OPEC oil producer could reduce their oil output by 1.5 million barrels per day cut, while Novak put the figure at 1.7 million b/d.

Since the cut agreement came into effect on January 1, the market has been eager to come by any hard evidence to show the extent of the output reductions.

Nevertheless, the monitoring committee – comprising OPEC and non-OPEC producers – has agreed to use independent estimates based on secondary source data, and not country self-supplied figures.

These secondary sources, including S&P Global Platts, compile monthly estimates of each country’s output for the preceding month. Their inclusion has been a contentious issue for some countries, such as Iraq, where data from various sources had shown significant differences previously.

As independent estimates of OPEC and non-OPEC production started to flow in from multiple sources, there are a few broad outcomes. The most likely scenario is a satisfactory amount of cutback achieved compared to the targeted golden number of 1.8 million b/d by OPEC and 11 non-OPEC producers.

A less than satisfactory performance, say below 50 per cent, is quite unlikely, and the market would probably have been pre-emptively warned about such an outcome.

An optimistic, but equally unlikely outcome, is a 100 per cent adherence to the quotas. At the rate prices are faring currently, the market seems to have taken this largely into account.

Investors alternated between ruthlessness and boundless optimism last year, at times pulling the rug out from under oil prices while eyeing OPEC promises with great scrutiny, but then rallying on rhetoric and reassurances without much else to go on. 

The element of surprise now lies in exactly what the final percentage of adherence is, what context it is delivered in, and whether investors deem it a satisfactory enough rate of progress to lead the next five months with.

Although the producers participating in the cut seem optimistic of achieving full compliance with their goals, the light at the end of the tunnel that is the market equilibrium may still be some way to go.

While Saudi Arabia and Russia have cut production significantly, some OPEC members have had the opposite challenge. Libya, plagued by political strife, plans to raise its oil output back up to 1.25 million b/d by the end of this year.

Its current production stands at about 650,000-700,000 b/d, interrupted by power shortages and technical difficulties, but is way up on the 230,000 b/d it produced in August. All the country’s major oil export terminals are open.

Libya’s leaders have been quick to reassure investors that the return of Libyan oil production will not be rapid enough to derail the supply cut deal.

To no one’s surprise, US$50/b (Bt1,750) crude has brought along with it a resurgence in shale oil, most rapidly from US production basins.

By late January, US output had surged by 500,000 b/d from its July 2016 low to just shy of 9 million b/d.

However, analysts seem divided on whether this is a significant enough counter to the 1.8 million b/d pledged to be taken out from the global pool. 

Eesha Muneeb is a senior specialist, Oil Price Assessments.


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