Last week 22 OPEC and non-OPEC nations agreed to extend crude oil production cuts — previously announced in November 2016 — for an additional nine months, sidelining 1.8% of total global supply until the end of March 2018.
Now, as was the case then, it was done to help rebalance the global crude market, helping to ease surplus conditions and support prices given continued growth in US shale oil production, something that has made this process slower to achieve.
Aside from helping to rebalance the market, it’s easy to see why some nations agreed to extend production cuts, particularly among non-OPEC producers.
Not only are they benefiting from a recovery in prices, many have not actually lived up to their end of the bargain by actually cutting output.
This excellent table from the Commonwealth Bank shows that perfectly.
Akin to a report card, it show compliance to the production cuts agreed upon late last year. Green indicates those nations that have lived up to their end of the deal, red is those who have not.
There’s a lot of the latter for non-OPEC producers, including Russia.
“OPEC has complied around 10% above their requirement,” says Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, suggesting that the group’s outperformance is an achievement.
However, when it comes to non-OPEC producers, he says their compliance levels have been “far less impressive”.
“The group were closer to around 40% of their commitment in January and February before moving higher as Russia finally cut production in early May,” says Dhar.
While, to date, that hasn’t ruffled the feathers of those nations who are complying, Dhar says that “compliance is still critical for the extended deal to work”.
“The success of the accord to bring down global oil stockpiles to the 5-year average is conditional on the accord participants genuinely reducing exports for nine months,” he says.
That’s something that markets are currently grappling with — will the deal actually hold?
Commodity researchers at JP Morgan don’t see it lasting, writing in a note last week that the deal is likely to collapse at the end of this year “as cheating becomes untenable for core OPEC members”.
“Consequently, the 2018 oil market balance now points to rapid builds in inventories which, absent continued OPEC support, should depress oil prices,” said David Martin, executive director at JP Morgan.
While he sees the deal unravelling, Dhar suggests that it will stick until its expiry in March next year, forecasting that Brent crude will average at $US56 per barrel by the final quarter of this year as surplus conditions ease.
However, like JP Morgan, Dhar says prices are still likely to head lower over the longer term.
“We don’t see the 22 OPEC and non-OPEC producers working together until the end of the decade,” he says. “We still anticipate Brent crude oil to dip to $US45 per barrel by mid-2019.”
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