Since we're experts in oilfield factoring and other factoring services, we've been paying close attention to the results of the OPEC meeting. The hopeful outcome of the OPEC meeting and negotiations was a widely-accepted oil output freeze or, even better, a reduction in oil output. Up until Thanksgiving morning (November 24), optimism was high. Negotiations took a downward spin, however, when Saudi Arabia pulled out of a November 28 meeting with non-OPEC oil producing countries. The explanation given was that such a meeting was pointless until a “clear decision within OPEC” was made.
According to Forbes, “This move was intended to increase pressure on recalcitrant OPEC members, Iran and Iraq, to agree to freeze the cut quotas set by the technical committee.”
Following this action, the Algerian oil minister presented Iran with a new option. The proposal was a 1.1 million barrel per day (bpd) OPEC cut with a 600,000 bpd non-OPEC cut. The reply was that the Iranian oil minister would study the proposal and give a formal response at the November 30 OPEC meeting in Vienna. This turn of events meant that the debate over production rates and quotas would resume, despite the already agreed upon production quotas.
The international drama continued as Iran’s official Mehr News published a piece claiming that Saudi Arabia was “reneging on earlier promises” and was waging “a full-blown psychological war against Iran and a number of other OPEC members”.
When questioned about the issue, Saudi oil minister, Khalid al-Falih replied that the country maintained the same position that all OPEC nations cooperate in the production deal. “We expect the level of demand to be encouraging in 2017, and the market will reach balance in 2017 even if there is not intervention by OPEC”, he stated.
Saudi Arabia made it clear that it was prepared to walk away if OPEC failed to reach an agreement, and that it would not make any additional concessions. Considering that Saudi Arabia is OPEC’s biggest producer, the concern was warranted. As the situation reached a climax, the oil industry and oilfield factoring industry industry anxiously awaited the OPEC meeting’s outcome.
OPEC and Non-OPEC Countries Agree to Production Cuts
With the news that Saudi Arabia and Iran signed on a deal at OPEC’s meeting, Brent oil prices surged above $50 a barrel. Surprisingly, Saudi Arabia led the oil producers’ cartel in the pledge to remove 1.2 million bpd from global oil production, with the understanding that non-OPEC countries would add 600,000 bpd to that number. This amounts to almost 2% of global production – far beyond the amount markets anticipated. In fact, a proposed cut of this size is the first since 2008.
The success of this cut, however, hinges on several factors. First, continuation depends on non-OPEC members such as Russia reliably committing to also cut output. Second, the speed at which American shale producers step up production will also have a large impact. The third, and more recent factor to consider, is the U.S. President-elect Donald Trump’s dream of oil self-reliance.
A meeting of non-OPEC members then took place in Vienna December 10, following the OPEC meeting November 30. The 11 non-OPEC members that participated in this meeting included: Russia, Kazakhstan, Azerbaijan, Oman, Mexico, Sudan, South Sudan, Bahrain, Malaysia, Equatorial Guniea and Bolivia. A deal was struck in which this group of oil-producing countries agreed to cut supplies by 558,000 bpd. While this number is short of the initial target of 600,000 bpd, it is still the largest contribution by non-OPEC oil producers ever. It is also the first time in 15 years that a global pact of this magnitude has been reached. Before the weekend closed, it was announced that OPEC would meet again on May 25, 2017 to monitor the progress of the deal.
Oil Market Doubts for 2017
Oil rallied again following the historic December agreement with non-OPEC nations to cut supply. Considering both the production cuts and a higher than anticipated demand for OPEC crude, it was forecasted - in OPEC’s latest monthly report - that these events would rebalance the oil market in the second half of 2017.
However, experts are fearful this new oil era will not experience the demand previously enjoyed. For example, emerging giants like China are not increasing their demand at the same speed they once were. Previously, the country was expanding its national oil stockpile to take advantage of cheap crude prices. Michal Meidan, Asia analyst at consultancy Energy Aspects, has estimated that the 120 million barrels in the SPR in 2016 could fall to 80 million barrels in 2017. This would take away the most important support for oil demand in the past two years.
According to The Wall Street Journal, analysts are saying that “After years of healthy growth fueled by low prices and Asia’s expanding appetite, demand for oil next year could increase at its slowest pace since 2014.”
Another risk to oil demand, the Federal Reserve raised its benchmark interest rate by a quarter of a percentage point on Wednesday (December 14). When U.S. rates rise, the demand for crude in emerging markets typically falls. There is also the risk that U.S. shale drilling will increase, as a result of higher prices. These factors will present a challenge for OPEC and the oil rally moving into 2017.
“If supply, consumption, or inventories respond too quickly to the new landscape, OPEC’s short-term gain could lead to long-term pain,” says a Bank of America Merrill Lynch analysis.
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