Amid rising skepticism over whether OPEC – and potentially, Russia – can follow through on a proposal to cut their oil output, the International Energy Agency (IEA) said on Tuesday that the “real work starts now” with thorny issues surrounding the deal yet to be worked out.
Oil prices rallied on Monday after major oil producer Russia said it was ready to join OPEC in an output freeze deal loosely agreed in September when OPEC agreed to discuss cutting supply to between 32.5 million barrels a day (mb/d) and 33 mb/d. The deal is aimed at cutting the global supply overhang that has weighed on prices.
Details over who will bear the brunt of the cuts are due to be set by end-November but there is already growing wariness among market-watchers about how the deal can be implemented.
In its latest monthly oil report on Tuesday, the IEA said that “now the real work starts” when it comes to the deal.
“Critical details – like individual country allocations, production baseline and implementation date – need to be finalised when OPEC meets on 30 November. Iran, Libya and Nigeria – all aiming to raise output – are said to be exempt from cuts. A significant rebound in supply from Libya and Nigeria and further growth from Iran would suggest that bigger cuts would have to be made by others, such as Saudi Arabia, to meet the new output target.”
What’s more, the IEA noted that global oil supply rose by 600,000 barrels a day in September, largely due to supply from Russia and “all-time high” production from OPEC – the producers who are telling markets they are ready to cut output.
The IEA said in its latest monthly report on Tuesday that world oil output in September reached 97.2 million barrels a day (mb/d) up 200,000 barrels a day on a year ago “due to strong OPEC growth.”
“Our estimate for September shows crude supply from the group’s 14 members climbing to 33.6 mb/d – an all-time high. The extent of any cooperation from non-OPEC producers such as Russia is still to be determined,” the IEA said.
There is widespread scepticism about the deal elsewhere too. Goldman Sachs warned on Tuesday that an oil production cut by Russia and Saudi Arabia would not be enough to rebalance the market. It also said that growing output volumes from Libya, Nigeria and Iraq would likely mitigate the ability of the market to rebalance in 2017.
Reuters also reported on Tuesday that Nigeria, Iran and Libya all planned to boost their oil output, signalling more fragility for the deal.
Oil prices jumped as much as 3 percent on Monday on news that Russia was ready to join OPEC in a cut but pared gains on Tuesday amid scepticism over a real cut to supply. Benchmark Brent crude for December delivery is currently trading at $52.92 a barrel while U.S. West Texas Intermediate (WTI) is at $51.15.
Aside from growing scepticism about whether OPEC can agree and actually implement (and enforce) production cuts, the IEA noted that OPEC production was already at record highs:
The group’s crude output rose by 160,000 barrels a day in September to a record 33.64 mb/d “as Iraq pumped at the highest ever and Libya reopened ports.” As such, OPEC supply is 900,000 barrels a day above what it was last year due to “robust Middle East output.”
Chances of rebalancing?
What’s more, higher oil prices are attracting more non-OPEC players put out of action by low oil prices and high production costs back to the market, again denting hopes of markets rebalancing.
The IEA noted that although non-OPEC supply is forecast to drop by 0.9 mb/d in 2016, it was forecast to rebound by 0.4 mb/d in 2017.
In the meantime, demand is forecast to expand by 1.2 mb/d this year, with a similar gain expected in 2017, demand growth is slowing, the IEA warned.
“Growth continues to slow, dropping from a five-year high in the third quarter of 2015 to a four-year low in the third quarter of 2016 due to vanishing OECD growth and a marked deceleration in China,” the IEA said, although it noted that “the potential for colder weather should see growth rebound somewhat in the fourth quarter of 2016.”
The IEA said that even after around two years of low oil prices, “even now, producers such as Russia are showing impressive resilience. So are Middle East OPEC countries whose record-smashing performance has raised the group’s oil output,” the IEA said.
On a more pessimistic note, the IEA said that the “the converse is true for demand.”
“Even with tentative signs that bulging inventories are starting to decline, our supply-demand outlook suggests that the market – if left to its own devices – may remain in oversupply through the first half of next year. If OPEC sticks to its new target, the market’s rebalancing could come faster.”