IEA: OPEC delivering on its promise to cut output

The estimated OPEC production in January was at 32.1 mb/d and the cuts achieved a record initial compliance rate of 90%, the International Energy Agency (IEA) said in its Oil Market Report.

To remind, the OPEC members and Russia in November 2016 reached a deal to reduce oil production in order to deliver some balance to the oil market.

According to the data in the report published on Friday, some producers like Saudi Arabia cut even more than was initially agreed.

Seaborne oil export data, from which secondary source estimates of OPEC production are mainly derived, are not complete for January and are subject to revision. However, IEA said OPEC appeared to have made a solid start to what is a six-month process. This first cut is certainly one of the deepest in the history of OPEC output cut initiatives, IEA added.

As far as compliance by the non-OPEC producers is concerned, Russia stated at the time of the agreement that its production cut of 300 kb/d, more than half the 558 kb/d committed by the eleven countries that agreed to join the OPEC cuts, would be phased in gradually and preliminary data shows output down by 100 kb/d in January.

IEA stated in the report that even though there is no official data to corroborate their claims, Oman said it had cut production by 45 kb/d, in line with its commitment while Kazakhstan is reportedly exceeding its target.

For non-OPEC countries outside of the output deal, IEA expects significant increases in production. Brazil, Canada, and the US are expected to increase production by 750 kb/d in 2017. The net change in non-OPEC production in 2017, taking into account cuts by eleven countries, is close to a 400 kb/d increase.

For US LTO, recent increases in drilling activity suggest that production will recover and the IEA’s forecast is a growth of 175 kb/d for the year as a whole with production in December expected to be 520 kb/d up on a year earlier.

Demand grows

Demand wise, global growth has been revised upwards for the third month in a row and stands at 1.6 mb/d for 2016. IEA noted a stronger than expected growth in Europe, partly influenced by colder weather in the final quarter of last year.

The overall demand growth was also aided by the long-term growth in China, India, and non-OECD countries. In 2017, assuming normal weather conditions, IEA expects demand to grow by 1.4 mb/d, an increase of 0.1 mb/d from the last report.

The report stated that if the January level of compliance is maintained, the difference between global demand and supply implies a stock draw of 0.6 mb/d. OECD stocks of crude and products have fallen for five consecutive months. Regardless, there were still 286 mb above the five-year average level, and by the end of the first half of this year, they will remain significantly above average levels.

IEA ended the report by stating that the continued existence of high stocks, plus caution from the markets in assessing the level of output cuts and how other producers might grow production, explains why Brent crude oil prices have remained at the mid-$50s/bbl level. As it stands, the oil market is very much in a wait-and-see mode.