On November 30, OPEC agreed to cut its group output to 32.5 M/bpd. Those cuts were to take effect on January 1. As we discussed last week, early data suggest that most members are complying with the deal, which is set to remain in effect until the group’s next meeting in June. The non-OPEC production cut agreement signed in early December by Russia and other major producers has also taken effect. They too seem to be complying for the most part.

But as we’ve repeatedly cautioned, even with full compliance these cuts will meaningfully impact long-term oil prices, and prevent a medium-term ‘re’-collapse of oil prices due to added supply, only if the depths of the cuts counteract the swelling of global supply. And it remains to be seen whether this will be the case.

Surveying the 2017 budget plans of North American companies, one trend is strikingly apparent. This time last year, layoffs were still mounting, projects were being delayed and cancelled, and capital guidance was focused on ‘doing more with less’ rather than investing for growth. What a different a year makes. Now, companies are boosting spending after many of them experienced a positive fourth quarter in 2016. More spending means more activity, and more activity means more production. More production means more supply. And if demand isn’t a sturdy counterbalance, more supply means lower prices. That’s why we spit in the oil market punchbowl earlier this year in our prognostication that if the parts of the ‘oil whole’ aren’t careful, 2017 could look like 2014.

It is in light of these concerns that we now shift to OPEC’s read of the oil market presented in its latest monthly report. How the group sees itself positioned right now is an important indicator of how the pieces on the global O&G chessboard are moving.

First, demand, which has too often been an overshadowed concern in developing a short- and medium-term outlook for oil. OPEC expects global oil demand growth in 2016 to increase by 1.32 mb/d, following an upward adjustment of 70 tb/d to reflect continued better-than-expected consumption in OECD Europe and Asia Pacific. Total oil demand is now estimated to average 94.62 mb/d, factoring in base line adjustments to China of around 0.12 mb/d. In 2017, world oil demand growth is seen to reach 1.19 mb/d, representing an upward revision of 35 tb/d to now average 95.81 mb/d. Demand for OPEC crude in 2016 averaged 31.3 mb/d, an increase of 1.8 mb/d over the previous year. In 2017, demand for OPEC crude is expected to average 32.1 mb/d, around 0.8 mb/d higher than last year.

In terms of supply, OPEC has upwardly revised non-group supply growth in 2016 by 50 tb/d to now show a contraction of 0.66 mb/d on higher-than-expected output in 4Q16. In 2017, non-OPEC supply growth has been revised up by 120 tb/d to now show an increase of 240 tb/d, due to a pick up in US drilling activities and investment, where the active oil rig count has risen almost weekly since early summer 2016, and, as mentioned above, companies are transitioning from maintenance to growth mode. OPEC NGL production is forecast to grow by 0.15 mb/d in 2017, following growth of 0.15 mb/d in 2016. In January, OPEC production decreased by 890 tb/d, according to secondary sources, to average 32.14 mb/d- an even steeper decline than the group’s new 32.5 mb/d output ceiling.

Looking at oil prices, the OPEC Reference Basket averaged $52.40/bbl in January, a gain of $0.73 over the previous month. WTI and Brent also saw gains, increasing by $0.44 and $0.53 to average $52.61/bbl and $55.45/bbl, respectively. And OPEC too observed what we pointed out at the outset. “Production adjustments by OPEC and some non-OPEC producers supported the market, although gains were capped by increased drilling activity in the US. The Brent-WTI spread widened slightly to average $2.84/bbl in January.”

In terms of global oil storage, total OECD commercial stocks dropped in December 2016 to stand at 2,999 mb. At this level, OECD commercial oil stocks are 299 mb above the five-year average. Crude and products indicated surpluses of around 216 mb and 83 mb, respectively. In terms of forward cover, OECD commercial stocks stood at 63.9 days, some 5.5 days higher than the five-year average.

Finally, moving from the micro oil picture to the macro world economic scene, OPEC said its global economic growth expectations remain at 3% in 2016 and 3.2% in 2017. OECD growth this year was revised up to 1.9%, following upward adjustments in the Euro-zone and UK. US economic growth remains unchanged at 2.2%. Forecasts for China and India in 2017 also remain unchanged at 6.2% and 7.1%, respectively. Russia’s 2017 growth was revised up to 1.0%, while Brazil’s growth forecast remains unchanged at 0.4%.

A healthy economic picture has significant implications for global oil demand. The outcome of the dynamism between oil supply and demand and the world economy will significantly impact the movement of oil prices this year and beyond.

About The Author Jeff Reed

I specialize in analysis of the oil and gas sector- with emphasis on the Middle East, OPEC, and the politics of energy. I hold a BA in Political Science and MA in Theological Studies from the University of St. Thomas. Prior to a career in oil and gas journalism, I was a Roman Catholic priest serving churches in the Houston area. I also taught high school for a year in Oakland, California, and worked for two years in retail management. Among my other areas of interest are political philosophy, religion and society, culture and the arts, and philosophy.