Before the agreement among producers, IEA’s demand and supply numbers suggested that the market would re-balance by the end of 2017. But OPEC, Russia and other producers are looking to speed up the process. If OPEC promptly and fully sticks to its production target, assessed at 32.7 million bpd, and non-OPEC producers deliver the agreed cuts of 558 000 bpd outlined on 10 December, then the market is likely to move into deficit in the first half of 2017 by an estimated 0.6 million bpd. This is not a forecast by the IEA, it is an assumption based on the numbers in OPEC’s 30 November agreement, subsequently reinforced by the non-OPEC producers.
After the first half of 2017, the analysis is complicated by the fact that the proposed cut is for six months, and will be reviewed at the next OPEC ministerial meeting at the end of May. This can be seen as prudent given the underlying uncertainties in the oil market and the global economy but also a warning that production restraint might not be extended. The price curve reflects this with a sharp increase in short term prices but shows relatively little movement further out. OPEC also appears to be signalling that high cost producers should not take for granted that they will receive a free ride to higher production. These high cost producers, who assume that the cuts at the very least guarantee a floor under prices, might think twice before taking the risk of sanctioning new investments.
Clearly, the next few weeks will be crucial in determining if the production cuts are being implemented and whether the recent increase in oil prices will last. For contractual and logistical reasons, the industry might initially see that the output cuts do not fall neatly into place. The deal is for six months and the IEA should allow time for it to be implemented before re-assessing its market outlook. Success means the reinforcement of prices and revenue stability for producers after two difficult years; failure risks starting a fourth year of stock builds and a possible return to lower prices. What a difference a year makes!
