OMR: The first cut is the deepest
10 February 2017
Observers of the oil market this month are focussing on the level of compliance with the production cuts agreed by members of OPEC and eleven non-OPEC countries, closely followed by interest in the expected recovery in US light, tight, oil production. The IEA estimates that OPEC production in January was 32.1 mb/d and that the cuts achieved a record initial compliance rate of 90%, with some producers, notably Saudi Arabia, appearing to cut by more than required. While seaborne oil export data, from which secondary source estimates of OPEC production are mainly derived, are not complete for January and is subject to revision, OPEC nevertheless appears 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.
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, would be phased in gradually and preliminary data shows output down by 100 kb/d in January. While no official data has been released, Oman says it has cut by 45 kb/d in line with its commitment and Kazakhstan is reportedly exceeding its target.
For non-OPEC countries outside of the output deal, we expect significant increases in production in, for example, Brazil, Canada and the US whose combined output is expected to grow by 750 kb/d in 2017. The net change for 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 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.
On the demand side of the balance, global growth has been revised upwards for the third month in a row and for 2016 it is now seen at 1.6 mb/d. Stronger than expected growth in Europe, partly influenced by colder weather in 4Q16, is a key factor alongside the long-term growth in China, India and non-OECD countries. In 2017, assuming normal weather conditions we expect demand to grow by 1.4 mb/d, an increase of 0.1 mb/d from the last Report.
We do not forecast what OPEC production will be during the six months covered by the output deal; but if the January level of compliance is maintained, the difference between global demand and supply implies a stock draw of 0.6 mb/d. It should be remembered, though, that this stock draw is from a great height. OECD stocks of crude and products have fallen for five consecutive months and in 4Q16 they drew by nearly 800 kb/d. At the end of the year they were still 286 mb above the five-year average level and by the end of 1H17 they will remain significantly above average levels.
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 since mid-December after receiving a post-output deal boost of close to $10/bbl. The oil market is very much in a wait-and-see mode.