An OPEC Agreement to reduce production was signed today. In many ways the Agreement is impressive. It asks for more than 1.0 million b/d of production cut. It allocates reductions to each country. It includes Iran and Iraq. But even so, there is a little less there than meets the eye. It feels a little like a magician’s use of smoke and mirrors. Important aspects of the announced agreement include:
– Indonesia suspended its membership, which means they move back to the non-OPEC side of the supply ledger. It also means OPEC can point to a 32.5 million b/d effective production ceiling. Recall this was the lower boundary of the level of production they targeted back in September when they first agreed to act. This is a convenient coincidence.
– Nigeria and Libya were not required to cut output
– The other countries of OPEC agreed to cut output by 1.2 million b/d for the period January-June 2017, as shown in the below table.
– As shown in the table, Saudi Arabia, Kuwait and UAE took the lion’s share of the cut. Iraq cut from an elevat-ed level to a level more consistent with their sustaina-ble production. Iran will raise production.
In terms of market impact, this agreement, at first glance, is impressive since it has the potential to re-move a significant volume of crude oil from the market. However, against this reduction in output, one must consider gains in Libya and Nigeria, which ESAI Energy estimates could increase by a combined 550,000 b/d be-tween November and the end of the first quarter of 2017. This cuts the utility of this agreement down to about 600,000 b/d.
Meanwhile, the transfer of Indonesian production from OPEC to non-OPEC has reduced the call on OPEC for the first half of 2017 to 32.0 million b/d. Given the production cut outlined above and gains in Nigerian and Libyan output, ESAI Energy estimates OPEC production will average 32.4 million b/d in the first half of 2017. Thus, the first half of 2017 will not technically fall into deficit (see revised global oil balance table on next page). By the third quarter, all other things held equal, a renewal of the agreement would clearly lead to a supply/demand deficit. This will certainly lift crude oil prices in the second half of 2017, and it will encourage higher prices in the interim, especially if these promises all come to pass. As of now, ESAI Energy has not revised its crude oil price forecast, released yesterday.
As for non-OPEC, the Agreement refers to an expected cut of 600,000 b/d. We remain skeptical of signifi-cant contributions, but Russia bears watching. The Global Oil Balance on the following page does not reflect a deliberate reduction in non-OPEC output, which would tighten 2017 further. Stay tuned on non-OPEC.