The oil market witnessed a significant demand-supply imbalance during the past 2 years and this led to a sharp decline in the global prices. The prices for the major international benchmark, ICE Brent declined from its peak of ~$100 per barrel (in the mid-2014) to the intermittent lows of around ~$35 per barrel (in the first half of 2016). The surplus situation was mainly due to a persistent increase in production from the US, sluggish demand growth and reluctance from the OPEC to cut down production. For the last two years, there was a surplus in the global oil industry, this stood around 1.7 MBPD during 2015 (source: EIA data). The situation moderately improved in 2016 mainly owing to a decline in the production from the North American region (US and Mexico among others) along with China, while demand growth continued to be moderate. This helped and pushed the surplus situation to a low of 0.7 MBPD in 2016.
Televisory in its earlier blog on crude oil (Crude oil, trend in global demand-supply, prices and its impact on major players) mentioned that for any major structural change in the commodity’s demand-supply balance, a strong action is required from the producers. The OPEC, which is the largest oil supplier’s group in the world, in its meeting on September 30th, 2016 in Algeria did suggest to cut down the production. Therefore, as per the latest meeting on November 30th, OPEC agreed to cut down the production by 1.2 MBPD to 32.5 MBPD, this will be effective from 1st January 2017.
The agreement is a result of the collective efforts of the OPEC members and is an outcome of numerous meetings held in the past 6-7 months along with the Algeria Accord. OPEC leaders extensively consulted with the members and non-members (oil producers), to come out with an agreement to cut the production. Moreover, other than the 1 MBPD worth of cut planned by the OPEC, the non-OPEC producers too have agreed to cut the output by 0.6 MBPD. On the other hand, Russia, the largest non-OPEC member, has surprised the market by proposing to cut its production by 0.3 MBPD.
Saudi Arabia, the largest oil producer in OPEC agreed to reduce its production by 486,000 BPD to 10.05 MBPD. Iraq, the second-largest producer is likely to cut the output by 210,000 BPD to 4.35 MBPD. Further, most of the other members were also given specific targets to cut down the output except Iran. Therefore, Iran will increase its output by 90,000 BPD to 3.79 MBPD as it recovers from the sanctions imposed by the US in 2012. Libya and Nigeria were excluded from the agreement as both the nations are facing internal political conflict.
Agreed crude oil production adjustments and levels (000 BPD)
** Indonesia suspended its membership.
Source: OPEC Press Release
These developments have come as a shot in the arm for the crude oil prices, mainly ICE Brent and NYMEX-WTI, both surged higher by ~10% after the announcement. The share prices of major energy companies around the globe such as Exxon Mobil Corp., Chevron Corp., etc. too stepped up following the announcement.
Source: Bloomberg Data and Televisory’s Research
Although this is a positive development, it would be too early to state that the oil market would definitely stabilise in the medium-term. The strength of this agreement depends on how the OPEC members deliver on their commitments. The past track record of many OPEC members is not very conducive in this regard since they have defaulted on their commitments. Additionally, with an official agreement lined up with the non-OPEC members, there is a bit of uncertainty on when and how much cuts in the actual production will be seen from players such as Russia. On a broader perspective, any substantial gains in the oil prices from now onward could trigger the US based shale producers to once again increase their production and may create fresh imbalances in the market. At last, all eyes will be at the meeting on the 9th of December, 2016, when non-OPEC members may finally declare their stand on the proposed production cut.
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