The Organization of the Petroleum Exporting Countries on Wednesday appeared very close to committing its fractious members to their first oil production limits in eight years. Now comes the hard part.
With multiple reports suggesting that a deal is imminent, top oil exporter Saudi Arabia faces the unenviable tasks of policing cartel members and keeping crude prices within a range that will relieve pressure on oil-producing countries’ economies, but which will dissuade non-OPEC producers from increasing output.
Analysts broadly expect an agreement to boost oil prices above $50 a barrel and keep them there. Prices have wavered between about $40 and $54 since the spring.
Commodity watchers also believe the deal will set up a long-awaited balance between oil supply and demand in the first half of next year. The market has been oversupplied for more than two years, by as much as 2 million barrels a day.
“The OPEC producers are close to being capped out, and the ones that do have significant spare capacity continue to face security problems that will likely imperil any ramp-up plans in the near term.”
But OPEC now has a difficult needle to thread. Oil rigs began popping up in U.S. oil fields when prices approached $50 a barrel, and analysts believe high-cost producers outside OPEC will further ramp up production if crude prices rise above $55 a barrel.
That includes U.S. shale drillers, which have built a backlog of partially completed wells in anticipation of a price recovery. Once prices rise, they could switch on that production-in-waiting.
While many see oil prices averaging between $50 and $55 next year, analysts are not united on the path to that level. Goldman Sachs believes the deal will cause crude prices to spike in the first half of 2017, and then moderate in the second half as both OPEC and U.S. shale producers capitalize on the rally.
But JPMorgan sees prices rising slowly but steadily quarter after quarter. The bank cautioned that the deal is essentially aimed at preventing an even larger buildup of oil stockpiles. The world’s storage facilities are brimming with crude and refined fuels.
Anticipated accommodations the cartel is seen offering to Iran, Libyaand Nigeria would mean that total OPEC production will likely increase next year, even as other members cut output in the first part of 2017, JPMorgan said.
Skeptics have long warned that OPEC members are notorious cheaters and may not stick to quotas agreed to on Wednesday in Vienna. But RBC Capital Markets said adherence may not matter so much this time for a simple reason: OPEC members are near full-tilt, and they don’t have much more capacity to pump.
“The OPEC producers are close to being capped out, and the ones that do have significant spare capacity continue to face security problems that will likely imperil any ramp-up plans in the near term,” RBC wrote in a note.
“Libya and Nigeria collectively have more than one and a half million barrels that are currently off the market, but neither of these countries is close to resolving the political and security problems that have shut in output.”
No respite from non-OPEC members
Beyond OPEC, other countries aren’t helping out those who hope for higher prices, the International Energy Agency said in its latest oil market report. Demand for oil around the world is expected to increase by 1.2 million barrels a day in 2017, a rate of growth that would match this year.
The IEA also projects Russia, the world’s largest oil producer, to increase its crude output by 230,000 barrels a day this year. The agency says Russia could boost production by another 200,000 barrels a day next year.
Saudi Arabia is trying to secure output cuts from Russia, but it’s unlikely that will happen, said Chris Weafer, co-founder of consulting agency Macro Advisory Partners.
The Russian government, which owns a majority share in that country’s big oil companies, would face a revolt from minority shareholders if it sought to limit production, he said. From a technical perspective, Russia can’t turn off the taps, because much of the production comes from areas with freezing temperatures where drillers must keep oil flowing, he added.
“Russia cannot agree to a production cut because it cannot deliver on that,” Weafer told CNBC.
The IEA also expects Brazil, Canada and Kazakhstan to pump more in 2017. That would push total non-OPEC output growth to 500,000 barrels a day next year, compared with a projected decline of 900,000 barrels a day this year.
“This means that 2017 could be another year of relentless global supply growth similar to that seen in 2016,” IEA said.