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OPEC Production Cut Numbers Are In. Will Oil Prices Move Higher?

By Ellen R. Wald, Ph.D.CommoditiesFeb 08, 2017 05:05AM ET
www.investing.com/analysis/opec-production-cut-numbers-are.-how-will-oil-markets-react-200175020
OPEC Production Cut Numbers Are In. Will Oil Prices Move Higher?
By Ellen R. Wald, Ph.D.   |  Feb 08, 2017 05:05AM ET
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S&P Global Platts, one of the secondary sources of oi production data that OPEC will use to determine compliance with its November 2016 deal, has released its numbers for January 2017. (Full chart available here). According to these data, every OPEC country required to cut (Libya, Nigeria, and Iran received exemptions) has cut oil production.

Some countries have yet to implement their allocated production cuts fully, but only Iraq is still producing significantly above its allocation. The compliance rate stands at 91%, a seemingly positive sign towards resolving the supply overhang, but market watchers may not see it that way.

The current reduction rate is 1.14 million bpd (compared to eventual planned cuts of 1.2 million bpd). To achieve the current rates, Saudi Arabia, Angola, and Kuwait all cut production in excess of their allocations. This has helped offset slight overproduction from Algeria, Gabon, Qatar, the UAE, and Venezuela and more significant overproduction from Iraq.

Technically, the OPEC deal can be considered a success as long as the production average over the first six months of 2017 comes out to 1.2 million bpd. This means averaging the production rate over the first six months should yield a rate 1.2 million bpd less than prior to the agreement. The real test for OPEC will be whether these cuts are reflected in higher oil prices throughout the six-month period of the deal.

In January, excess production cuts from major oil producers Saudi Arabia and Russia helped keep the price of oil elevated. Hedge funds seem to be betting that conditions promoting higher prices will continue, at least for the next several months. They are perhaps reacting to news that Venezuela failed to secure needed investment for its oil industry and now expects its oil production to drop by another 200,000 bpd.

However, there is no guarantee that these tentative movements toward ending the supply overhang will continue. In fact, there are many signs that oil is actually overpriced right now.

Some factors that could result in a price correction despite the OPEC deal:

  • Production from American shale oil producers appears poised to increase over the next 24 months.
  • EIA data reveal that gasoline, diesel, and oil inventories in the U.S. are actually higher than they were at this time last year, showing an increased oversupply.
  • Production numbers from Libya and Nigeria (countries exempted from the OPEC cuts) have shown signs of growth.
  • Russia cut production in excess of its 300,000 bpd commitment due to inclement winter weather. As we head towards spring, those issues will likely resolve and Russia will be tempted to increase production.
  • Oil production in the Gulf of Mexico (non-OPEC and not beholden to the OPEC—non-OPEC production agreement) recently reached record levels, and several companies have opened new areas of production this year.
  • Non-OPEC production cut implementation numbers have yet to be released and could reveal a much lower rate of compliance.

As a global commodity, all producers and consumers contribute to the balance of supply and demand. Much of the fundamentals indicate that oil price projections should be lower.

We may be starting to see this correction now. However—and this is a very important caveat—the impression that speculators have can override the fundamentals.

OPEC Production Cut Numbers Are In. Will Oil Prices Move Higher?
 

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OPEC Production Cut Numbers Are In. Will Oil Prices Move Higher?

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Ely Honrubia jr
Ely Honrubia jr Feb 09, 2017 1:47PM ET
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Oil higher cement lower
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Brad Smith
Brad Smith Feb 09, 2017 6:31AM ET
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Thank you Ellen for your continued indepth coverage of the oil market. The drop in OPEC production is currently mirrored by an increase in US rig counts. I seriously doubt the OPEC deal will move the oil price much higher if at all. OPEC's influence has been waning for quite some time and their inability to drive the oil price higher is further evidence of this. I do believe the stabilization in the oil price was a result of the OPEC deal but that is likely the limit of the deal's impact.
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Feb 09, 2017 6:31AM ET
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Rigs increase as a function of anticipated pricing. Rigs do not pump crude oil.
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WMS STARGAMES
WMS STARGAMES Feb 08, 2017 8:43AM ET
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So, we may see price under 50 again, but how far, it is not only technical but also fundamentals
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WMS STARGAMES
WMS STARGAMES Feb 08, 2017 8:43AM ET
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Just to add, thank you Ellen
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nio eli
nio eli Feb 08, 2017 8:41AM ET
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Live your myth with deals to cut production .Every one needs money to serve debts
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Igor Pi
Igor Pi Feb 08, 2017 8:40AM ET
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what's wrong with the pop up window? it keeps appearing
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Feb 08, 2017 8:16AM ET
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Nothing but speculation, meanwhile, price keeps dropping. It has been proven that Saudis fudged summer production numbers and applied them to a "cut". It is proven that Russia fudged export data. Rug merchants.
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Tony Mahomi
Tony Mahomi Feb 08, 2017 8:10AM ET
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And China and India will not need Petrol ? only the US Military the Petrol consumption is higher than Denmark !! Now we are on short again ?
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Tahir Azhibek
Tahir Azhibek Feb 08, 2017 8:00AM ET
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No chart Attached
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Ellen R. Wald, Ph.D.
Ellen R. Wald, Ph.D. Feb 08, 2017 8:00AM ET
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Thanks. I'll see about getting that link fixed.
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Ellen R. Wald, Ph.D.
Ellen R. Wald, Ph.D. Feb 08, 2017 8:00AM ET
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Chart comes up on desktop version, may be an issue with mobile.
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Feb 08, 2017 5:20AM ET
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Everyone know us shake will offset the cuts. Opec has the worst timing. Prices are headed lower then maybe 60 by summer.
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