OPEC managed to secure the support of 11 other oil nationsin a joint output-cut pact Dec. 10, highlighting a show of strength and unityacross global producers that could mark a new era in cooperation aimed at bringingstability back to global oil markets.
The deal may only amount to an extra 258,000 bbl/d to the1.5 million bbl/d in cuts agreed upon between OPEC and Russia on Nov. 30 inVienna, a relatively small step, but in terms of symbolic importance andpsychological shift, it represents a huge leap forward.
OPEC had tentatively signed off on a deal to cut productionby 1.2 million bbl/d from October levels to about 32.5 million bbl/d from thestart of January 2017 along with a commitment from Russia to slash output by300,000 bbl/d.
Russia on Dec. 10 said it would gradually reduce output,snipping 50,000 bbl/d to 100,000 bbl/d in the first quarter of 2017 and towarda 200,000 bbl/d cut by the end of March. OPEC and Russia also got firmcommitments from other oil producers to share the burden and send a meaningfulsignal to the markets.
The other key non-OPEC producers on board include Mexico,which has agreed to trim output by 100,000 bbl/d from its 2.1 million bbl/d;Kazakhstan, which will lop off 20,000 bbl/d from its 1.7 million bbl/d output;Oman, which will cut 45,000 bbl/d from production of about 1 million bbl/d; andAzerbaijan, which will reduce output by 35,000 bbl/d from its 800,000 bbl/d.
Malaysia has also agreed to cut 20,000 bbl/d from itsestimated production of 700,000 bbl/d. The remainder of the reduction comesfrom Bahrain, Brunei, Equatorial Guinea, Sudan and South Sudan.
"This is a very bullish development," said GaryRoss, executive chairman of Pira Energy Group, an analytics unit of S&PGlobal Platts. "The aim is to get faster rebalancing as the productioncuts pull down stocks and push the market into backwardation in order to getthe highest prices possible."
While OPEC said it was not targeting prices, Ross noted thatthere are two objectives at work: eliminating surplus stocks and keeping pricesin a $50 to $60 range by targeting $60 a barrel.
OPEC said the arrangement will last for six months with theoption to extend for another six months if necessary. The oil ministers saidthe door was open for other producers to join in, and they would continuedialogue with those outside the agreement as well as those who joined.
Saudi oil minister Khalid al-Falih also mentioned thatOPEC's largest producer could cut to below 10 million bbl/d if needed.
Naysayers will point to how much some of the cuts will bepart of natural declines and maintenance that would happen anyway, but OPECstressed the accelerated schedule in any voluntary or managed decline.
Mexico, whose production plan is 1.944 million bbl/d in 2017from October's 2.103 million bbl/d, is in the spotlight as this would be areduction of 159,000 bbl/d over the year. However, the 100,000 bbl/d appears tobe a faster reduction over the six months.
Kazakhstan, another big non-OPEC player at the meeting, hashad to wrestle with the fact that production from its long-troubled Kashaganfield could triple to more than 300,000 bbl/d next year, so even its agreed-uponsmall cut from other fields of 20,000 bbl/d shows significant willingness.
"Several of the participating countries are essentiallynon-starters because either their output was forecast to decline anyways, ortheir output is so small, that a cut is largely symbolic more than impactful tothe supply and demand balance of the globe," said Tony Starkey, an analystfrom Bentek, an analytics unit of S&P Global Platts.
OPEC and Russia's planned cuts also have to be put intocontext, with Saudi Arabia producing at unusually high levels in October, diminishingthe impact of its 486,000 bbl/d reduction, Russia recording record output inOctober, Venezuela production in continued decline anyway and Iraq stillunsatisfied with secondary source estimates despite committing to the deal.
There's also the fact that Nigeria and Libya have beenexempted from cuts and could actually add more than 500,000 bbl/d to the mix,while Iran is also a special case and will keep pumping at high levels.
"Since they began discussing a collective freeze orcut, OPEC and Russia have increased supply by well over a million bbl/d into apersistently glutted oil market while oil prices have doubled, an extraordinaryfeat of perception management if not supply control," said Bob McNally, ananalyst with Rapidan Group in Washington.
Possibly the biggest question that will hang overimplementing the cuts — and has since Nov. 30 — is whether the cuts will becomplied with, and the past has not been too kind on both OPEC and joint OPEC,non-OPEC agreements.
This means that the ways they are monitored and the waysthey are enforced, especially since these producers don't have independentsecondary sources to estimate output, will be need to be transparent andrigorous.
These have still to be worked out, but Falih was keen topoint out the "enthusiasm" and "conviction" from those whoagreed and noted it was integral to the deal. The monitoring committee includesAlgeria, Kuwait and Venezuela from OPEC, along with Russia and Oman.
Since 1990, there have been two instances of coordinated OPECand non-OPEC cuts — in 1998 to 1999, which spanned three formal agreements, andin November 2001 — but neither exhibited the level of commitment from as manyoil producers as the Dec. 10 accord.
"Compliance is usually very good at the beginning andthen once prices go up then this commitment starts to wane," Ross said.
With this new oil producer pact accounting for about 50% ofthe global oil market, it will be interesting to see how U.S. shale responds,and the market will keep a close eye on U.S. rig count data.
Falih was skeptical that shale would respond quickly andsuggested that shale won't compensate for the reduction in 2017, stating,"There is a significant time lag with U.S. shale." But some analystshave poured cold water on that claim and think shale can be a competitivethreat in the $50/bbl to $60/bbl range.
For now, the biggest threat for OPEC and other producers isthat, at low prices, it will continue to choke off investment. As Falih notedafter the meeting, the shock in the last couple of years shows how unique andsensitive the oil market is: a less-than-2% oversupply caused more than a 70%drop in prices and a matching drop in investment.
And with OPEC and non-OPEC countries reaching a new peak forongoing cooperation, there is certainly a positive framework to manage such afragile market and provide a stable reliable energy supply.
"With OPEC agreeing to produce closer to 33 millionbbl/d, you've eliminated the stock build and you start drawing by April, whichis very significant for price and crude structure," said Yasser Elguindi,an analyst with Medley Global Advisors. "At a minimum, you've eliminatedthe downside risk to crude in the near-term."
S&P Global Plattsand S&P Global Market Intelligence are owned by S&P Global Inc.