OPEC to reduce output by about 1.2 million bpd from January 2017
Representatives of OPEC and several other major oil producers regrouped in Vienna on Friday, January 20th, 2017, for their first meeting to monitor compliance with an agreement reached on November 30th, 2016 to curb output. On November 30th, 2016, OPEC members agreed to the first production cut in eight years in an effort to prop up global crude oil prices and normalize record global oil inventories. OPEC, which met on the sidelines of the International Energy Forum (IEF) in Algeria from September 26th-28th, 2016, agreed to reduce oil output to 32.5 million barrels per day (bpd) from 33.24 million bpd, driving a spike in crude prices since then.
Ministers from Saudi Arabia, Kuwait, Algeria, and Venezuela met counterparts from non-OPEC nations Russia and Oman to figure out ways to verify that the 24 signatories to the historic deal are following through on their pledge to remove a combined 1.8 million bpd of supply from the market over the next six months starting January 01st, 2017. They intend to prove that the group is serious about eliminating a three-year crude oversupply and dispelling skepticism stemming from previous unfulfilled promises.
International oil prices rose to an 18-month high of more than $58 a barrel on December 10th, 2016 after the OPEC and several non-members agreed to end two years of unfettered production and instead cut output. Oil prices fell on January 13th, 2017, and ended the week 3% lower on doubts whether the OPEC would deliver its promised oil cuts.
Saudi delivers on promises
Non-OPEC countries including Russia indicated that they would reduce production by about 600,000 barrels a day. Saudi Arabia, OPEC’s largest producer, promised to reduce output by 486,000 bpd to 10.05 million bpd. Saudi has delivered on its promise to cut production, and said that its output had fallen below 10 million bpd so far in 2017 to levels last seen in February 2015 and that it expects to make even deeper cuts in February 2017. OPEC’s overall production fell by 220,900 bpd to 33.085 million bpd in December 2016, led by declines in Saudi Arabia and Nigeria, according to OPEC data published on January 18th, 2017.
The first two weeks of January saw strong compliance and the majority of producers are already exceeding their pledged cuts. Saudi Arabian Energy Minister Khalid al-Falih said that producers have cut 1.5 million bpd so far in 2017. Countries involved in the deal could reduce their output by 1.7 million bpd by the end of January 2017. Given that 11 of OPEC’s 13 members along with 11 non-OPEC countries have agreed to make cuts during H1 FY17, full compliance could take global oil inventories back to their five-year average by mid-2017, lowering oil in storage by around 300 million barrels.
Russia, the world’s largest oil producer, has pumped an average of 11.1 million bpd in January 2017, a reduction of 108,000 bpd for both November 2016 and December 2016. Russia has said that it would make a reduction of 300,000 bpd by April 2017 or May 2017. If all members fully comply with their promised output curbs, oil price could rise to $55 to $60 a barrel by June 2017.
Crude prices reverse gains
Reacting to the news, oil prices edged up on January 23rd, 2017, but reversed earlier gains when data showed that US production would rise further over the next few months. Data from the US Energy Information Administration (EIA) showed that domestic production was about 8.9 million bpd in 2016 and is expected to climb to 9 million bpd in 2017 and 9.3 million bpd in 2018. Brent crude futures LCOc1, the international benchmark for oil prices, were trading at $55.57 per barrel on January 23rd, 2017, up 8 cents from their last close. US West Texas Intermediate (WTI) crude futures were up 8 cents at $53.30 a barrel on the same day.
Moreover, crude oil prices also fell when Baker Hughes Inc.’s (NYSE: BHI) data as of January 20th, 2017, showed another pickup in US drilling activity. US energy companies last week added the most rigs drilling for new production in almost four years. Drillers added 29 rigs in the week to January 20th, 2017, bringing the total count up to 551, the most since November 2015.
The strength of the OPEC deal will depend on whether all parties would deliver on their commitment. Saudi Arabia and its Gulf allies, the UAE, and Kuwait, have traditionally stuck to their cuts, but some others have not, particularly when prices are low. Any doubt in the market could once again see prices come under pressure.
The OPEC monitoring committee plans to hold two meetings ahead of the next ordinary OPEC meeting in Vienna on May 25th, 2017, at which point it intends to extend the cuts by another six months. The focus now shifts to OPEC’s next meeting that is set to take place after March 17th, 2017, in Kuwait.