Oil & Gas
Strong start to OPEC, non-OPEC oil output cuts
Representatives of Organization of Petroleum Exporting Countries (OPEC) and several other major oil producers met in Vienna for their first meeting to monitor compliance with an agreement to cut output.
Brent oil prices that fell to $27.10 a barrel a year ago rose to an 18-month high of more than $58/bbl after OPEC and several non-members agreed on December 10, 2016 to end two years of unfettered production and instead cut output.
Oil prices rose more than 2 percent on expectations that the meeting of the world’s top oil producers would demonstrate compliance to a global output cut deal, but rising US drilling activity limited gains.
Ministers from Saudi Arabia, Kuwait, Algeria and Venezuela met counterparts from non-OPEC nations Russia and Oman to verify that the 24 signatories to the historic deal are following through on their pledge to remove a combined 1.8 MMbpd of supply from the market for six months. OPEC members, Nigeria and Libya, both suffering setbacks in production, were given exemptions.
The objective of the meeting was to prove that the group is serious about finally eliminating a three-year crude oversupply and dispel skepticism stemming from previous unfulfilled promises.
With January not yet complete, the meeting focused mostly on how compliance will be assessed rather than producing any new data. The committee currently has no plans to use external agencies, such as consultants that track oil exports by monitoring tanker movements, to verify that countries are implementing the pledged supply curbs according to sources.
The organization agreed to reduce its output to 32.5 MMbpd, although that total included about 740,000 bpd of output from former member Indonesia.
Energy ministers laud strong start
Indications from the meeting reveal that OPEC and non-OPEC countries have made a strong start to lowering their oil output under the first such pact in more than a decade, energy ministers said. The Ministers said 1.5 million of almost 1.8 million barrels per day (bpd) had been taken out of the market already.
“The deal is a success. All the countries are sticking to the deal. The results are above expectations,” Alexander Novak, Russian Energy Minister said after the meeting.
Countries involved in the deal could reduce their output by 1.7 million bpd by the end of the month, Novak said.
“The Kingdom of Saudi Arabia has taken the initiative and other countries took part in very significant actions,” Khalid al-Falih, Saudi Energy Minister said.
“Despite demand usually being lower in the first quarter in winter, the actions taken by the Kingdom and many other countries has impacted the market in a tangible way and we have seen the impact in spot prices,” al-Falih said.
Falih said implementation of agreed cuts had been “fantastic” and he hoped for 100 percent compliance in February.
“We will not accept anything less than 100 percent compliance,” Essam Al-Marzouq,Kuwaiti oil minister who chairs the five-member ministerial compliance committee, said.
Venezuela has achieved more than half of its planned 95,000 bpd cut, Oil Minister Nelson Martinez said.
OPEC’s production fell by 220,900 bpd to 33.085 MMbpd in December, led by declines in Saudi Arabia and Nigeria, according to secondary sources data in the group’s monthly report published January 18.
The first two weeks of January saw “very strong” compliance and the majority of producers are already exceeding their pledged cuts, Saudi Arabia’s Minister of Energy and Industry Khalid Al-Falih said at the World Economic Forum in Davos, Switzerland. About 1.5 MMbpd of production has been withdrawn from the market so far.
The next milepost
After the first meeting, it was agreed that a technical joint committee (JTC) would be created comprising a representative for each of the five members of the monitoring committee and as well as the OPEC presidency, which is currently held by Saudi Arabia.
The JTC will cooperate with the OPEC Secretariat in compiling production data which will be presented to the ministerial monitoring committee by the 17th of every month, OPEC said in a news release.
The monitoring committee will communicate after the 17th of every month and plans two meetings ahead of the next ordinary OPEC meeting in Vienna on May 25. The next meeting in March is set for Kuwait.
Full compliance could take global oil inventories back close to their five-year average by mid-2017, lowering oil in storage by around 300 million barrels, Falih said.
“Everyone sees that the agreements on oil production cuts have already have a positive effect on oil markets. The market has become more stable and predictable,” Novak said.
Saudis see no need to extend deal
Saudi Energy Minister, Khalid Al-Falih believes the re-balancing of the oil market should take place by the end of the first half of the year. Demand will pick up in the summer, and OPEC wants to make sure markets are well-supplied, he said.
“We do not think it is necessary, given the level of compliance we have seen and given the expectations of demand to go beyond the 6 months,” Al-Falih said.
“The re-balancing which started slowly in 2016 will have its full impact by the first half. Of course, there are many variables that can come into play between now and June, and at that time we will be able to reassess,” he added.
Al-Falih said he was confident of the deal’s success. Many countries are “going the extra mile” in making deeper production cuts than they pledged, and OPEC will stop intervening in the market once global crude inventories return to their five-year average, he said.
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