Oil in 2017: Will the OPEC Deal Work? – 1/10/17

The promise of production cuts from OPEC and its partners gave oil prices a boost in 2016. Now the traders who bought in are waiting to see results.

Unlike in the U.S., where output is published weekly, members of OPEC can take months to release production numbers. Even then, their data can contradict independent surveys as most of the group’s members tend to cheat on their deals. Now all the waiting is putting at risk the little optimism left in the market as stories of rising rig counts in the U.S. pile up. Many analysts were skeptical about commitment to the deal from the start.

Still, 2017 could see a lack of any serious gains or losses.

Market prices already reflect OPEC cuts, and it is unlikely that 2017 will see any more major supply cuts unless Venezuela, the most unstable OPEC member, sees its production vanish all at once instead of in a gradual decline as expected. In fact, because OPEC plans to operate below capacity, there will be plenty of capacity to bring online should something unexpected happens.

On top of the flex capacity, bloated oil inventories remain large enough of a price dampener that reducing them is a major goal of OPEC’s intervention according to the group.

The IEA estimates that OPEC’s cuts could start to deplete inventories as early as the first quarter of 2017, while OPEC itself says that at best the deal will speed up the re-balancing of the global oil market, only resulting in demand exceeding supply in the second half of the year.

According to a Bloomberg survey, analysts are expecting crude prices to average $58 per barrel in the fourth quarter of 2017 with forecasts reportedly closer than usual.

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