With the Organisation of Petroleum Exporting Countries recently deciding to reduce production by 3% or 1.2mn barrels per day from early 2017, the focus now shifts to the implementation and impact of Opec’s first production agreement since 2008.
On November 30, the 14-member Opec, which accounts for a third of global oil supply, decided to slash production to 32.5mn barrels per day (bpd). Non-Opec producers are expected to join the deal to cut crude output in order to rein in a global glut.
Russia also agreed to cut output gradually by 300,000 bpd as part of the Opec deal, in the first half of 2017. Russia and other non- Opec producers are set to meet with Opec next week in Doha to take the deal forward.
Oil prices steadied at around $53.5 a barrel on Friday after the biggest weekly rally since 2009 following Opec’s decision to cut crude output to stabilise the global market.
As per the deal, Opec will reduce output by about 1.2mn barrels per day by January, fulfilling a plan sketched out in Algiers in September to cut its production to 32.5mn bpd. The agreement exempted Nigeria and Libya, but gave Iraq its first quotas since the 1990s.
“The strength of the deal will depend on whether all parties deliver on their commitment,” a Bloomberg dispatch said.
“The GCC-based producers in Opec, have traditionally stuck to their cuts, but some others haven’t, particularly when prices are low,” It said.
Opec will earn $341bn from oil exports this year, according to the US Energy Information Administration. But that’s down from $753bn in 2014 before prices crashed, and a record $920bn in 2012.
Opec will meet again on May 25 next year, at which point it intends to extend the cuts by another six months.
According to the Washington DC-based Institute of International Finance (IIF) – the global association of the financial industry, global inventories are still very high, and US inventories have edged upwards in recent weeks as production has increased after a decline since mid-year. High inventories, US producers on standby and potential shifts in US energy policy act as “counterweights to whatever upwards price pressures the Opec agreement may create”, it said.
The deal to cut production, notwithstanding; oil prices may not surpass $60 a barrel for the next five years, IIF said and noted it does not consider the Opec decision “a game changer”.
Expecting global inventories to decline in 2017 by 1mn bpd, IIF said it has adjusted its price forecast for 2017 upwards to $52 from $49.
The Opec agreement is not a game changer in the oil market, as US shale producers remain the marginal suppliers. However, downside risks to oil prices have been reduced as state oil producers have shown more willingness to adjust production if needed to protect revenues, IIF noted.
