Steep Opec production cuts could ease an oil market surplus quicker than expected in 2017, the oil cartel signalled in its first output assessment since a deal to curb supplies and bolster prices came into effect.
After more than two years of allowing market forces to balance supply and demand, Opec in November agreed to again influence prices that had crashed in a manner that was far more severe than anticipated.
A year of talks and diplomatic wrangling between ministers of Opec’s resource-rich economies that had been battered by the oil downturn led to the first supply cut deal since the financial crisis.
Opec agreed to reduce its output by around 1.2m barrels a day starting in 2017. A calculation using the 13-member group’s January production numbers, which were published on Monday, suggested curbs of around 1.1m b/d from Opec’s October baseline numbers.
This implies more than 90 per cent compliance in the first month of the six-month deal to tackle excess inventories.
Should the group’s production continue at current levels, there will no longer be an oil surplus in the second half of the year, Opec said in its monthly oil market report.
Higher than expected global oil demand will mean a greater need for the cartel’s crude, it added.
The report struck a more optimistic tone than last month’s report, which signalled that the cartel needed to maintain or even increase output cuts beyond the first six months of 2017, with supply threatening to overwhelm demand.
“Opec compliance has started off on a very strong note as expected but this will need to be sustained throughout the year to run down the inventory overhang,” said Amrita Sen, chief oil analyst at Energy Aspects. “There is still a lot of work to be done.”
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Monday’s report follows a similar tally by the International Energy Agency on Friday, which showed the cuts by the oil cartel have been “one of the deepest in the history of Opec output cut initiatives”.
The price of benchmark Brent crude fell 88 cents to $55.82 a barrel following three consecutive days of rises as traders reacted to reports of greater than expected compliance with the deal.
Opec still faces an uphill struggle as higher prices make way for greater output from producers outside of the cartel such as US shale oil drillers.
January production for Opec, excluding conflict-ridden Nigeria and Libya which were exempt from the deal, stood at just under 29.9m b/d, according to data from secondary sources such as consultants and analysts submitted to Opec.
This is a drop from the October level of almost 31m b/d. This tally, using the third party data, is being used to calculate output cuts and monitor compliance among members.
It excludes Nigeria and Libya and includes a special dispensation for Angola, which is permitted to use its September figures. Iran after years of sanctions against its oil industry is allowed to increase output.
Total Opec production was at 32.1m b/d in January.
Saudi Arabia, Opec’s de facto leader, contributed the biggest cuts to production of almost 600,000 from October levels. The kingdom’s “direct communication” numbers, government numbers submitted to Opec, shows even steeper curbs.
Saudi Arabia’s energy minister Khalid Al Falih had said in recent weeks that the supply cut deal may only need to last for six months.
Opec also sought co-operation from outside the cartel. Russia and other non-Opec countries agreed to cut around 600,000 b/d.
Opec revised higher its world oil demand figures for 2016 by 180,000 b/d to 94.6m b/d and for 2017 by around 200,000 to 95.8m b/d.