OPEC Deal: Good Compliance, Pessimistic Reactions – 2/6/17

OPEC members seem committed to showing commitment to their deal for whatever that’s worth.

In OPEC’s initial agreement, production data compiled by analysts in the group’s secretariat will be the principal tool for judging whether members are complying with the deal. Notably, the data won’t cover non-members such as Russia. The committee also has no plans to use external agencies to verify implementation of the pledged supply curbs.

Still, non-official channels are happy to keep track for them. Tanker-tracker Petro-Logistics SA estimates that oil supplies from OPEC plunged in January in one of the first outside assessments of compliance. OPEC will reduce supply by 900,000 barrels a day in January, about 75% of the cut that the producer group agreed, according the Geneva-based consultant group.

The data suggests “a high level of compliance thus far into the production curtailment agreement,” said Daniel Gerber, CEO of Petro-Logistics.

An implementation rate of 75% is high relative to past deals such as the 2008 deal where it only reached 70%, according to Hasan Qabazard, OPEC’s former head of research.

For now, there’s no indication that the cuts will need to be extended beyond the initial six-month term, Algeria’s representative Boutarfa said at a recent meeting, echoing previous comments by the Saudi oil minister.

Unfortunately for OPEC, six months of cuts may do little to move prices. The U.S. rig count has been rising and, with a looming resurgence in U.S. output, analysts have their doubts about the efficacy of the OPEC agreement and any future deals the group could make. As the capacity for oil production in the U.S. rises and global demand for oil falls, the group’s power over the market is a fraction of what it once was during the 1973 Oil Embargo and resulting crisis.

The latest energy outlook by supermajor BP illustrates the market-share/price problem facing OPEC.

BP’s Energy Outlook 2017 estimates that there is an abundance of oil resources, and “known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond”. BP expects oil demand growth to slow down in the years to come and pegs the cumulative oil demand until 2035 at around 700 billion barrels, “significantly less than recoverable oil in the Middle East alone”.

In this view, low-cost producers — primarily OPEC nations and Russia — would try to seize more market share. BP predicts that the abundance of oil resources would prompt the lowest-cost producers to pump the low-cost barrels as quickly as possible before demand falls off.

However, OPEC has the recent experience of oil prices crashing weighing on it. After attempting to force high-cost shale drillers out of the market and seeing the resulting drop in oil revenue OPEC appears reluctant to return to a market-share strategy. But OPEC’s decision to cut supply is currently benefiting U.S. shale putting the cartel in a lose-lose situation.

Commenting on OPEC’s current and future relevance and influence on the oil markets, Wood Mackenzie said in an analysis last week:

“The group may still be able to control oil prices to a limited degree, but the benefits of that control will accrue to parties outside the cartel. If OPEC remains a functional entity by the end of 2017, its greatest hits will surely be in the past.”

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