The decision by OPEC, the 13-member Organization of Petroleum Exporting Countries, in late November 2016 to pare production after an 8-year hiatus helped to immediately push up international oil prices. By early January 2017, oil was trading at around US$54 per barrel, more than double of what it was selling for a year earlier, when it hovered at $26 per barrel.
In a last ditch attempt to reduce global crude stock and deplete surplus oil inventory, OPEC members agreed at their November meeting to cut output by 1.2 million barrels per day (mb/d). to 32.5 mb/d for a period of six months, starting in January 2017. All members of OPEC, with the exception of Iran, Libya and Nigeria, as well as Indonesia, which has since then suspended its membership in the organization, are mandated to trim their output by 4.5 percent, using October 2016 production of 33.7 mb/d as a reference level. Meanwhile, 11 non-OPEC oil producing countries headed by Russia and including Kazakhstan, Oman and Mexico also agreed to cut production by 558,000 barrels per day in 2017.
Kuwait, which has been elected to chair a Joint Ministerial Monitoring Committee that will strictly monitor adherence of members to the agreement, reported in mid-February that its evaluation of member states’ output cuts in January revealed there was general compliance with the agreement.
Kuwait’s Oil Minister Essam Al-Marzouk, who heads the committee, said in a recent statement to the media that "OPEC compliance with the output cuts is excellent ... Compliance has reached 92 percent." He added that non-OPEC members had also delivered on more than half of their promised production cuts. “At the time when producers signed the deal, the initial commitments were to gradually increase cuts until April and May, so we were expecting to see some producers not fulfilling the 100 percent cuts immediately,” Al-Marzooq noted.
“We understand the circumstances, and in February we are talking to non-OPEC producers to raise their cuts according to their commitments,” the oil minister said. He added, “OPEC is urging oil suppliers outside the group to fulfill their commitments to cut output, and crude prices will rise once producers demonstrate better compliance with their agreement to clear the global glut.”
Despite this general compliance and optimism on depleting the global oil glut, it is apparent that OPEC members, mainly Saudi Arabia, will have to consider deeper production cuts than they initially signed up for. The return of Nigeria and Libyan crude supplies to the market as meant that the oil cartel’s total production figure of 33.87 mb/d for November was higher than the October reference level by 150,000 barrels per day.
Moreover, reports from the United States show that oil rigs have begun popping up at a rapid rate in US oil fields since prices approached the $50 a barrel mark. By December, 65 previously idled oil rigs in the US were back online, bringing the total oil rig count there up to 525 — the highest in over a year. This includes US shale producers who had built a backlog of partially completed wells in anticipation of a price recovery, and were steadily switching on this ‘production-in-waiting’ in line with rising oil prices. Crude production in the US was up to around 8.7 mb/d and analysts believe that high-cost producers outside OPEC will also further ramp up production if crude prices rise above $55 a barrel.
The silver lining in the current scenario is that the International Energy Agency (IEA) has revised its global oil demand forecast for 2017. The agency now estimates that growth will now be to the tune of 100,000 barrels per day higher and reach 1.3 mb/d in 2017, mainly on the back of better than expected demand in the US and revisions in Chinese and Russian data.
The IEA believes that taken together — compliance by OPEC and non-OPEC members to production cuts, and the relatively upswing in global demand — global crude inventory could swing to a deficit of around 0.6 mb/d in the first-half of 2017. However, this assumption is based on the hope that both OPEC and non-OPEC members continue to adhere to their individual production cut quotas, and that US shale production does not resurface with even greater force to once again upset the supply-demand equation.
If global oil prices continue to rise in the coming months, then at their next meeting in June, OPEC can afford to pat themselves on the back for a job well-done and for demonstrating that the organization still has the teeth to shape markets. However, should cracks appear in the alliances compliance and oil once again begins to seep into the market, then, the unenviable task of maintaining overall production cuts will most probably fall on Saudi Arabia and its GCC allies. Under those circumstances, whether the GCC countries will be willing to shoulder that burden could determine how oil prices flow in the months ahead.