So far, OPEC compliance with its production cut goals appears to have been good, with cold weather and natural declines adding to reductions from non-OPEC producers, resulting in Russia being ahead of schedule.
Some OPEC members have exceeded their compliance targets, notably Saudi Arabia and Kuwait. The only real laggards are Iraq, the UAE and Venezuela.
Overall, OPEC production in January, according to an S&P Global Platts survey, was down 690,000 b/d to 32.16 million b/d from December. The impact of the cuts was offset by gains of a combined 260,000 b/d from Nigeria and Libya, both of which are exempt from the deal, while Iranian production edged up by 30,000 b/d, which again is within the scope of the deal’s terms.
Compliance has been high enough to sustain the gains made in the oil price since the agreement was announced.
Given that the 10 OPEC members participating achieved 91% compliance with their October baseline and that Russia reduced output by 118,000 b/d in January from an overall target of 300,000 b/d in first-half 2016, it could be argued that there is not much more to come from the countries keenest to comply and make the deal a success.
Meanwhile, the International Energy Agency reported that end-December OECD total oil stocks fell below 3 billion barrels for the first time since December 2015, and that they fell 800,000 b/d in fourth-quarter 2016, the largest drop in three years.
This was before the cuts came into effect and must therefore be seen as a result of reduced non-OPEC production, in other words, OPEC’s earlier market share strategy.
However, a surge in US crude imports since the start of this year has pushed US stocks to near record highs, highlighting the challenge OPEC faces in accelerating the reduction in global inventories.
US crude stocks sat in early February just 3.5 million barrels below the all-time high of 512.1 million barrels seen in April 2016, according to Energy Information Administration data.
Given the transit time between the Arabian Gulf and US ports, the uptick in imports since January, notably from Saudi Arabia, may reflect a flurry of deals signed before the OPEC deal went into effect.
As for the demand outlook, it remains relatively strong, with oil consumption forecast to grow between 1.2-1.62 million b/d in 2017 and, according to the EIA, by 1.46 million b/d in 2018.
Non-OPEC production is expected to grow by 0.2-0.3 million b/d this year, returning to expansion after its 0.6-0.8 million b/d contraction in 2016. The EIA then predicts much more robust non-OPEC output growth in 2018 of 1.1 million b/d.
This suggests that in order to sustain a drawdown in stocks, OPEC may have to extend its production cuts through 2017, potentially ceding the majority of new market growth in 2018 to non-OPEC producers.
An extension of the supply deal past June will depend on market conditions when OPEC ministers next meet in Vienna May 25.
However, OPEC’s longer-term aim has to be to boost its own market share to accommodate rising production, particularly in Iraq and Iran, and a recovery in Nigerian and Libyan output.
Iraq announced in February that it has increased its estimated crude oil reserves by 7% to 153 billion barrels.
National Iranian Oil Company’s Managing Director Ali Kardor said Iran’s crude oil production is expected to hit 4 million b/d by mid-April and could rise to 4.7 million b/d within five years under an aggressive new drilling program.
Libyan officials have suggested their 1.2 million b/d target by end-year could be met by August – an increase of 500,000 b/d.
Iraq’s reserve increase may simply be a bid to increase its OPEC production allocation, but it is nonetheless hard to see how OPEC members’ ambitions can be accommodated, if it cedes market share to non-OPEC producers.