Given the current crude oil prices, OPEC Member States would have the right to think they have avoided a financial catastrophe.Although ten countries (of OPEC’s thirteen) have complied with nearly 85% of the output cut commitments they made, which is a very high level in the history of this organization, Brent prices are still falling short of the $55/b mark. This is barely $5/b above their October-2016 level, i.e. the month before OPEC’s output cut agreement was reached. OPEC Member States must be wondering what would have happened if they had not cut their production. And yet, these countries have not been short-changed, since (according to PETROSTRATEGIES’ calculations) they lowered the volume of their exports by 5% in January 2017, to 19.3 million b/d, but obtained a 26% rise in the crude oil price, compared with the 2016 average ($43.55/b). If these proportions are maintained over the rest of 2017, OPEC states will manage to significantly boost their oil revenues. Yet, they must remain disciplined, and the non-OPEC countries that pledged to make output cuts must be as good as their word.
The 10 OPEC Member States that committed to cutting their production by 1.26 million b/d in the 1st half of 2017, compared to the organization’s reference level of October 2016 (27.26 million b/d) have complied with 86% of their pledge on the whole. Their output fell to 26.185 million b/d in January 2017, i.e. only 178,000 b/d over the 26,007-million b/d mark that they had promised to respect. Yet this good result was only made possible thanks to the efforts of five countries that respected their reduction commitments, and even surpassed their targets. These countries are Saudi Arabia, Qatar, Kuwait, Gabon and Angola. In certain cases, the excesses of enthusiasm shown by these countries are perhaps involuntary (Gabon, Angola?) or due to seasonal circumstances (Saudi Arabia?). Other countries, on the other hand, have made practically no—or only slight—cuts to their production, such as Venezuela and the UAE. OPEC had set itself the target of ensuring that the combined production of all of its Member States would not exceed 32.5 million b/d as of January 2017, for a period of six months. This target has been reached, as OPEC’s total crude oil production was 32.1 million b/d. It stood at 33 million b/d in December 2016. It remains to be seen what the countries that are exempted from the cuts imposed by OPEC—Iran is allowed to increase its production by up to 90,000 b/d, while Libya and Nigeria are also free to raise theirs—will produce over the next few months.
Among the non-OPEC members that promised to cut their output, only two seem to have actually done so at this stage: Russia and Oman. The Russians had committed to gradually reducing their production by 300,000 b/d over the 1st half of 2017: they reportedly cut it by a little more than 100,000 b/d in January. The fact that OPEC is on the whole doing well to comply with its reduction pledges should encourage the Russians to continue to lower their output, too. The budget of the Federal State and the finances of Russian companies are in need of additional revenues and the price increase is proportionately much greater than the cut made to Russian oil exports. Not to mention the rise in the price of the gas exported by Gazprom, which is largely indexed on oil and which will therefore serve to boost these profits. Non-OPEC countries have committed to lowering their output by 558,000 b/d in the 1st half of 2017: that target is still far from being reached.
In its latest MOMR, the IEA observes that, if over the rest of the 1st semester of 2017 OPEC maintains the level at which it is currently complying with its output cut pledges, the difference between supply and demand could lead to inventories shrinking by around 600,000 b/d. Yet it should be noted that this destocking would commence from a very high level, warns the agency. At the end of 2016, the OECD zone’s oil inventories exceeded the average level posted over the last five years by 286 million barrels.
US shale oil is another big source of concern for OPEC. Its production was relaunched thanks to the price hike. Fortunately, global oil demand remains high: the IEA has just made an upward revision to the estimates it made for 2016 (+100,000 b/d), as well as its 2017 forecasts (+200,000 b/d). It should be hoped that this buoyant demand persists, because otherwise OPEC will be faced with a dilemma: suffer a price decline, due to competition from US shale, or resort to yet another production cut.