OPEC managed to secure the support of 11 other oil nations in a joint output cut pact Saturday, highlighting a show of strength and unity across global producers that could mark a new era in cooperation aimed at bringing stability back to global oil markets.
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The deal may only amount to an extra 258,000 b/d to the 1.5 million b/d in cuts agreed between OPEC and Russia on November 30 in Vienna, a relatively small step, but in terms of symbolic importance and psychological shift it represents a huge leap forward.
OPEC had tentatively signed off on a deal to cut production by 1.2 million b/d from October levels to around 32.5 million b/d from the start of January along with a commitment from Russia to slash output by 300,000 b/d.
Russia said Saturday it would gradually reduce output, snipping 50,000-100,000 b/d in the first quarter and towards a 200,000 cut b/d by end-March. OPEC and Russia also got firm commitments on Saturday from other oil producers to share the burden and send a meaningful signal to the markets.
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The other key non-OPEC producers on board include Mexico, which has agreed to trim output by 100,000 b/d from its 2.1 million b/d along with Kazakhstan, which will lop off 20,000 b/d from its 1.7 million b/d output, Oman which will cut 45,000 b/d from production of around 1 million b/d and Azerbaijan which will reduce output by 35,000 b/d from its 800,000 b/d.
Malaysia has also agreed to cut 20,000 b/d from its estimated production of 700,000 b/d. The remainder of the reduction comes from Bahrain, Brunei, Equatorial Guinea, Sudan and South Sudan.
"This is a very bullish development," said Gary Ross, executive chairman of Pira Energy Group, an analytics unit of S&P Global Platts. "The aim is to get faster rebalancing as the production cuts pull down stocks and push the market into backwardation in order to get the highest prices possible."
While OPEC stated it was not targeting prices, Ross notes that there are two objectives at work: to eliminate surplus stocks and to keep prices in a $50-60 range by targeting $60 a barrel.
OPEC stated that the arrangement will last for six months with the option to extend for another six months if need be. The oil ministers said the door was open for other producers to join in and they would continue dialogue with those outside the agreement as well as those who joined.
Saudi oil minister Khalid al-Falih also mentioned that OPEC's largest producer could cut to below 10 million b/d if needed.
Naysayers will point to how much some of the cuts will be part of natural declines and maintenance that would happen anyway, but OPEC stressed the accelerated schedule in any voluntary or managed decline.
Mexico, whose production plan is 1.944 million b/d in 2017 from October's 2.103 million b/d, is in the spotlight as this would be a reduction of 159,000 b/d over the year. However, the 100,000 b/d appears to be a faster reduction over the six months.
Kazakhstan, another big non-OPEC player at the meeting, has had to wrestle with fact that production from its long-troubled Kashagan field could treble to more than 300,000 b/d next year, so even its agreed small cut from other fields of 20,000 b/d shows significant willing.
"Several of the participating counties are essentially non-starters because either their output was forecast to decline anyways, or their output is so small, that a cut is largely symbolic more than impactful to the supply and demand balance of the globe," said Tony Starkey, an analyst from Bentek, an analytics unit of S&P Global Platts.
OPEC and Russia's planned cuts also have to be put into context, with Saudi Arabia producing at unusually high levels in October, diminishing the impact of its 486,000 b/d reduction, Russia recording record output in October, Venezuela production in continued decline anyway and Iraq still unsatisfied with secondary source estimates despite committing to the deal.
There's also the fact that Nigeria and Libya have been exempted from cuts and could actually add more than 500,000 b/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 or cut, OPEC and Russia have increased supply by well over a million b/d into a persistently glutted oil market while oil prices have doubled, an extraordinary feat of perception management if not supply control," said Bob McNally, an analyst with Rapidan Group in Washington.
Possibly the biggest question that will hang over implementing the cuts -- and has done since November 30 -- is whether the cuts will be complied with, and the past has not been too kind on both OPEC and joint OPEC, non-OPEC agreements.
This means that how they are monitored and how they are enforced, especially since these producers don't have independent secondary sources to estimate output, will be need to be transparent and rigorous.
These have still to be worked out, but Falih was keen to point out the "enthusiasm" and "conviction" from those who agreed and noted it was integral to the deal. The monitoring committee includes Algeria, Kuwait and Venezuela from OPEC along with Russia and Oman.
Since 1990 there have been two instances of coordinated OPEC and non-OPEC cuts -- in 1998-99, which spanned three formal agreements, and in November 2001 -- but neither exhibited the level of commitment from as many oil producers as the December 10 accord.
"Compliance is usually very good at the beginning and then once prices go up then this commitment starts to wane," Ross said.
With this new oil producer pact accounting for around 50% of the global oil market, it will be interesting to see how US shale responds and the market will keep a close eye on US rig count data.
Falih was skeptical that shale would respond quickly and suggested that shale won't compensate for the reduction in 2017, stating "there is a significant time lag with US shale." But some analysts have poured cold water on that claim and think shale can be a competitive threat in the $50-$60/b range.
But for now the biggest threat for OPEC and other producers is that at low prices it will continue to choke off investment. As Falih noted after the meeting, the shock in the last couple of years shows how unique and sensitive the oil market is: a less than 2% oversupply caused a more than 70% drop in prices and a matching drop in investment.
And with OPEC and non-OPEC reaching a new peak for ongoing cooperation, there is certainly a positive framework to manage such a fragile market and provide a stable reliable energy supply.
"With OPEC agreeing to produce closer to 33 million b/d, you've eliminated the stock build and you start drawing by April, which is very significant for price and crude structure," said Yasser Elguindi, an analyst with Medley Global Advisers. "At a minimum, you've eliminated the downside risk to crude in the near-term."
The table below shows the breakdown of the additional non-OPEC cuts:
Source: OPEC, S&P Global Platts
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