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ON THE LEFT: Oil market in wait-and-see mode

International Energy Agency

ON THE LEFT: Oil market in wait-and-see mode

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Observers of the oil market this month are focusing on the level of compliance with the production cuts agreed by members of Organisation of the Petroleum Exporting Countries (OPEC) and 11 non-OPEC countries, closely followed by interest in the expected recovery in United States light, tight, oil (LTO) production.

The IEA estimates that OPEC production in January was 32.1 millions of barrels per day (mb/d) and that the cuts achieved a record initial compliance rate of 90 per cent, 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 kilo barrels of oil per day (kb/d), more than half the 558 kb/d committed by the 11 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 11 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 fourth quarter of 2016, is a key factor alongside the long-term growth in China, India and non-Organisation for Economic Cooperation and Development (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.

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 per barrel level since mid-December after receiving a post-output deal boost of close to $10 per barrel.

The oil market is very much in a wait and see mode.