OPEC has agreed to cut output by 1.2 mb/d from January 2017 and secured a reduction of 558 kb/d from non-OPEC.As OPEC was deciding to cut production, its crude output in November was 34.2 mb/d, a record high, and 300 kb/d higher than in October. The group’s output stood 1.4 mb/d higher than a year ago.
Additional cuts in support of OPEC were agreed by non-OPEC countries, led by Russia. They are expected to curb 2017 growth from non-OPEC producers just over 0.2 mb/d from our previous estimate of 0.5 mb/d.
Global oil supplies in November edged up to a record high 98.2 mb/d, as a drop in non-OPEC output was more than offset by higher OPEC production.
Global oil demand growth of 1.4 mb/d is foreseen for 2016, 120 kb/d above our previous forecast. Robust 3Q16 US demand numbers and methodological changes for China were the main factors. Growth in 2017 is now seen at 1.3 mb/d.
OECD commercial inventories fell in October for the third month in a row. They have drawn 75 mb since reaching a historical high in July, but remain 300 mb above the five-year average. Product stocks have fallen twice as quickly as crude during that period. Preliminary data show stocks falling further across the OECD in November.
Refinery crude intake in 1Q17 is forecast to grow by only a modest 310 kb/d y-o-y, after growing by only 350 kb/d growth in 4Q16. The rally in crude prices following the announcement of coordinated OPEC/non-OPEC action may further squeeze refining margins, prompting product stock draws first on the way to market re-balancing.
Benchmark crude prices reversed their losses seen in November and rose by $10/bbl following the decision by OPEC and non-OPEC to cut output. Light sweet crude oil underperformed sour grades and this may well continue in the early part of next year. Fuel oil and naphtha were well supported due to higher Asian
WHAT A DIFFERENCE A YEAR MAKES
The final Report of 2016 analyses events as dramatic as those that kicked off the year. The focus in January was on $30/bbl oil and the imminent increase in Iranian oil production after sanctions were lifted. In December, we are seeing the first proposed output cut by OPEC since 2008 – and the first deal including non-OPEC producers since 2001 – which marks a major departure from the market share policy followed for the past two years. OPEC’s cut to crude production of 1.2 mb/d almost matches its deliberate production increase of 1.3 mb/d in the twelve months to October (the month on which the OPEC cuts are based), while the non-OPEC group has seen its crude output fall in the same period by about 0.9 mb/d. Meanwhile, following revisions to Chinese and Russian data, we have raised our 2016 global net demand growth number to 1.4 mb/d and that for 2017 to 1.3 mb/d.
Before the agreement among producers, our demand and supply numbers suggested that the market would re-balance by the end of 2017. But OPEC, Russia and other producers are looking to speed up the process. If OPEC promptly and fully sticks to its production target, assessed at 32.7 mb/d, and non-OPEC producers deliver the agreed cuts of 558 kb/d outlined on 10 December, then the market is likely to move into deficit in the first half of 2017 by an estimated 0.6 mb/d. This is not a forecast by the IEA, it is an assumption based on the numbers in OPEC’s 30 November agreement, subsequently reinforced by the non-OPEC producers.
After the first half of 2017, the analysis is complicated by the fact that the proposed cut is for six months, and will be reviewed at the next OPEC ministerial meeting at the end of May. This can be seen as prudent given the underlying uncertainties in the oil market and the global economy but also a warning that production restraint might not be extended. The price curve reflects this with a sharp increase in short-term prices but shows relatively little movement further out. OPEC also appears to be signalling that high-cost producers should not take for granted that they will receive a free ride to higher production. These high-cost producers, who assume that the cuts at the very least guarantee a floor under prices, might think twice before taking the risk of sanctioning new investments.
Clearly, the next few weeks will be crucial in determining if the production cuts are being implemented and whether the recent increase in oil prices will last. For contractual and logistical reasons, we might initially see that the output cuts do not fall neatly into place. The deal is for six months and we should allow time for it to be implemented before re-assessing our market outlook. Success means the reinforcement of prices and revenue stability for producers after two difficult years; failure risks starting a fourth year of stock builds and a possible return to lower prices. What a difference a year makes!