Opec beats oil output cut expectations

February 10, 2017

by: Anjli Raval, Oil and Gas Correspondent

Opec countries drastically curbed their output in the first month of their new production agreement, in the clearest sign to date that the world’s biggest oil producers are committed to living up to the November pact to cut global supplies.

The limits adopted by the oil cartel in January have been “one of the deepest in the history of Opec output cut initiatives”, the International Energy Agency said on Friday.

Brent crude, the international benchmark, jumped more than $1 a barrel after the IEA announced its finding, rising to $56.73.

Opec has a poor record of meeting targets and does not apply penalties to members who break limits, leading some analysts to question whether the November pact, the cartel’s first production cut in eight years, would be enforced.

But the IEA said the decline in output has surpassed expectations and achieved 90 per cent compliance at the start of the six-month supply agreement, helping to ease a global supply glut that caused the most severe price crash in more than a decade.

The group faces an uphill struggle with oil stockpiles remaining near record levels. Output from outside the cartel, including from US shale producers, have also had a new lease of life thanks to higher oil prices, which have held at near $55 a barrel since December.

Saudi Arabia, the world’s largest producer and Opec’s de facto leader, shouldered the bulk of the cuts, curbing output “more than required”, the IEA said. The move is a sign the kingdom is taking a more active role in influencing prices after more than two years of allowing market forces to balance supply and demand, and squeeze rivals.

The Saudi decision to allow oil prices to fall two years go had painful economic consequences across the Gulf, and its policy shift is a signal that Riyadh is seeking to raise revenues to fund a plan driven by deputy crown prince Mohammed bin Salman to overhaul the economy.

“Opec and Saudi get plaudits for month one but there are still five months of the deal to run,” said Bill Farren-Price, head of Petroleum Policy Intelligence. “It’s unlikely cuts are going to get deeper from here.”

Opec’s cuts drove a big drop in world oil supplies of 1.5m barrels a day in January. Should this be maintained, excess inventories should fall by around 600,000 b/d by the second half of 2017.

Producers from outside the cartel, such as Russia, Kazakhstan and Oman, also contributed to output curbs as part of the first joint supply agreement since 2001.

Despite steep producer cuts to reduce the global oversupply and prop up prices, oil stockpiles are expected to remain at elevated levels, the IEA said. “This stock draw is from a great height,” it said.

This could prompt Opec to extended its product cuts past the six-month mark, even though Saudi Arabia’s energy minister Khalid Al Falih said in recent weeks such a move may not be necessary.

While stocks in industrialised nations fell by the most in three years in the fourth quarter, by 800,000 b/d, they continued to build in China and other emerging economies.

Despite the fall in stockpiles, higher prices have driven an increase in drilling in the US as well as Brazil and Canada, where the IEA expects “significant increases in production”. Non-Opec production, led by US shale oil supply, is forecast to grow by 400,000 b/d in 2017 from last year.

“The oil market is very much in a wait-and-see mode,” said the IEA. High stock levels and interest in Opec compliance and the recovery of US shale production has held the price of Brent crude oil in the mid-$50s a barrel since mid December, it added.