We’ve repeated the refrain “compliance is key” over-and-over again since OPEC signed its production cut deal on November 30. The accord calls for the group’s 13 members to cut output to 32.5 M/bpd starting on January 1 and is applicable until June, when OPEC will review the deal at its next official meeting. Non-OPEC producers, led by Russia, agreed in early December to cut production by 580,000 bpd. With oil prices still in recovery mode, a growing number of analysts (and sources) indicate that on the whole OPEC is complying with the deal. Kuwait’s oil minister said recently that OPEC and other producers are likely to fully comply with the cuts, bringing global markets into balance early this year.
According to ClipperData information cited by Oilprice.com late last week, the US received about 150,000 bpd of oil from the Persian Gulf, West Africa, and South America. North Africa too is emerging as an important source of US imports. What’s particularly interesting though about the ClipperData information is that its shows Persian Gulf exports have fallen by a million barrels per day as exporters curb production.
However, as is often the case, nuance is also key. In Baker Hughes 4Q16 conference call, CEO Martin Craighead said the oil services provider plans to continue being active in the Middle East, precisely the region where producers are supposed to be cutting production. There’s a bit of a disconnect between the OPEC cuts that were announced and what we’re forecasting at least for the next six months in terms of activity…We see no pullback that would correlate to the announcement on a production cut. We still expect it to be relatively steady. A couple pockets of the more midsize to smaller players in the Middle East are actually going to increase.”
As Bloomberg observed, Baker Hughes bullish outlook for drilling in the region highlights the temporary nature of the output cuts (remember, they’re set to expire in June). Further, non-OPEC producers- chiefly the US- are ramping up as oil prices rebound above $55/bbl. 2017 budgets are expecting a bull at the 2017 finish line; not a bear.
The largest source of the planned output cuts is Saudi Arabia, which says that more than 80% of targeted reduction has been enacted. However, some of Baker Hughes’ customers in the Middle East have not amended their production goals for 2020 and 2025.
Craighead said that MENA is the second-largest market for the company (after NAM) in terms of revenue. Thanks partially to YE16 growth in the Middle East, Baker Hughes increased quarterly sales for the first time since the downturn began in mid-2014.
The number of active rigs in the Middle East dropped in December to the lowest level since August 2013, according to Baker Hughes data. The company plans to close its merger with GE Oil & Gas by mid-year, which will make it the world’s second-largest oilfield services company after Schlumberger.
Bart Melek, the head of global commodity strategy at TD Securities, told Bloomberg that the oil market is “becoming a bit more comfortable that OPEC may very well deliver the cuts it promised.”
The International Energy Agency also said recently that the market could rebalance in 1H17, versus its earlier outlook which saw a market recovery at the end of 2017 at the earliest. “If OPEC implements its production accord the market will probably balance in the first half of 2017. The level of compliance with the agreement holds the key,” Jon Custer, an IEA media coordinator, told Sputniknews.com.
Speculation has also surfaced as to what the impact of the US joining an output cut agreement would be. After all, its US producers who are upping their capexes and forecasted activity for 2017 in the wake of the oil price recovery. But with President Donald Trump now the titular head of US energy policy, and with his goal being US energy independence, the opposite will likely be the case going forward. And then there’s the legal reasons to boot:
“There is zero chance that the United States would join in an agreement to cut oil production. Such an agreement would be a violation of U.S. law, including the Sherman Antitrust Act and the Clayton Act,” James Hamilton, a professor of Economics at University of California San Diego, told Sputnik.
Also factor in the planned restart of some major projects worldwide this year, including the Kashagan field in the Caspian Sea, and the entire way in which the OPEC versus non-OPEC dynamism is once again playing out.
As we noted in our post last Thursday, 2017 bears some similarity to 2014 in at least one sense: with OPEC actually ceding market share to US shale producers, the possibility of the 2014 enmity between the two oil blocs “resurfacing” is once again palpable.
If OPEC complies with its cuts, and the US starts producing energetically again, the market could once again become imbalanced, oversupply could become pronounced, and the US vs. OPEC antagonism could once again characterize the oil market series.