OPEC Deal Likely to Fall Short – 12/14/16

The OPEC deal will bring oil prices up, but looks set to fall short of stated goals.

OPEC data shows that, throughout 2017, record oil inventories change little unless both OPEC and non-OPEC producers complying with supply restrictions in full. On paper, OPEC’s supply deal could drain almost half the global oil glut within six months. According to Bloomberg calculations using data IEA data, over the six months covered by the deal, 46% of the 300 million-barrel stockpile surplus could be cleared.

However, OPEC’s actual track record shows only 80% of promised cuts actually occur and Ali Al-Naimi, the former Saudi oil minister, has said OPEC members “tend to cheat.”

Non-OPEC nations have every reason to cheat on the deal and gain market share by pumping more. Benefiting from higher prices and more sales is a powerful incentive to put in minimal effort and call it compliance. For example, involuntary declines from aging fields are expected for most oil producers after years of heavy production which could be regarded as cuts.

In the 80% compliance scenario typical of most OPEC deals, non-OPEC rivals would need to make 600,000 barrels a day in genuine cuts to make a significant dent in global oil stockpiles in 2017. Reaching that number seems unlikely.

Exempt OPEC members Libya and Nigeria, as well as reluctant ones like Iran and Iraq already threaten to prevent substantial output declines. And the most crucial of non-OPEC producers, Russia, has a spotty record of following through on pledges to OPEC. When the effectiveness of the deal depends on Russia reducing output by as much as 300,000 barrels a day, its so-so history of cooperation doesn’t inspire much confidence.

Oil prices may rise as traders see any cooperation as a good sign, but cracks are already forming in the OPEC deal.

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