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All eyes are on OPEC and other major oil producers to determine whether they are complying with production cut agreements that were to take effect on January 1. According to the IEA, they are for the most part complying- at least judging by available, and in some cases preliminary, data.

The global energy watchdog group estimates that OPEC production in January was 32.1 M/bpd, and that cuts achieved a record initial compliance rate of 90%. Some producers, most notably Saudi Arabia, seemed to cut more than they initially pledged. “This first cut is certainly one of the deepest in the history of OPEC output cut initiatives,” the IEA said in its monthly report.

OPEC agreed on November 30 to limited production by 1.2 M/bpd, with major non-OPEC producers led by Russia pledging shortly thereafter to curb production by about 580,000 bpd. Russia said at the time of the early December agreement that its output reduction of 300,000 bpd, more than half of the non-OPEC commitment of 580 K/bpd, would be gradually phased in. The IEA cited preliminary data as showing Russian production down by 100 K/bpd in January. Furthermore, and with the qualifier that no official data has yet been released, Oman said it cut by 45,000 bpd in line with its pledge and Kazakhstan is reportedly exceeding its target, which is unexpected given the ramp-up of the giant Kashagan oilfield in the Caspian Sea.

However, as we’ve previously observed, even if these producers comply fully with their pledges, increased output from producers that did not pledge to cut threaten to keep the oil market imbalanced.

North America is of course ‘Exhibit A’ of the non-pledge producers. With oil rigs being added to US unconventional plays since last summer, and with companies transitioning from maintenance to growth in their 2017 budgets, US production looks particularly poised to rise in 2017. The US Energy Information Administration said in a February 7 report that US crude oil production averaged an estimated 8.9 M/bpd in 2016, and is forecast to average 9.0 M/bpd in 2017 and 9.5 M/bpd in 2018. The Permian Basin is the focal point for many North American producers, with spending plans aimed towards cultivating this rich formation. However, this ‘gift that keeps giving’ could become a curse for oil prices if the aforementioned cuts by other producers do not sufficiently offset the projected increase in US production.

The IEA report says that for Brazil, Canada and the US, total combined production is expected to rise by 750,000 bpd this year. But the net change for non-OPEC production in 2017, factoring in the cuts by eleven countries, is close to an increase of 400,000 bpd. For US light tight oil production, recent increases in the rig count- and corresponding drilling activity- indicate that output will recover and the IEA’s forecast is growth of 175,000 bpd for the year as a whole with output in December expected to be 520,000 bpd up on the previous year.

And then there’s demand. The IEA revised global growth upwards for the third consecutive month in its report. For the full-year 2016, the agency now sees demand at 1.6 M/bpd. Stronger than anticipated growth in Europe, influenced by colder weather in 4Q16, is a significant factor alongside the long-term demand growth in China, India and other non-OECD countries. This year, assuming normal weather conditions, the IEA expects demand to grow by 1.4 M/bpd- a 0.1 M/bpd increase from the previous month’s report.

The IEA said further that if the January level of compliance by OPEC is maintained, the difference between global supply and demand implies an inventory draw of 0.6 M/bpd. The agency issued an important caveat to this observation, however. Namely, that this “stock draw is from a great height.” OECD stocks of crude and products have declined for five straight months and in 4Q16 they drew by almost 800,000 bpd. At YE16, they were still 286 mb above the five-year average level and by the end of 1H17 they will remain significantly above average levels, according to the report.

The ongoing persistence of high global oil inventories, joined with caution from the markets in evaluating the level of production cuts and how other producers might boost production, explains why Brent oil prices have stayed in the mid-$50s since mid-December, falling from the initial post-output cut deal boost of close to $10/bbl.

Swimming downstream, the IEA reported that refinery runs were stronger on more solid product demand in 4Q16, with runs up 830,000 bpd YOY, following modest growth of 160,000 bpd in 3Q16. This brought average throughput growth for 2016 to 465,000 bpd. The IEA forecasts that 1Q17 refinery runs are expected to grow 200,000 bpd YOY.

The oil market is indeed still in a “wait and see” mode, the agency said. There are a lot of moving parts to the 2017 oil market story.

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.