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Compliance in focus as Opec deal kicks off

The possibility of members not sticking to output targets and rise in US production pose risks to the deal

Image Credit: Bloomberg
Delegates and media prepare ahead of the 171st Opec meeting in Vienna that decided on theproduction cuts in November. The 13-member Opec had pledged to cut production by 1.2million barrels per day.
Gulf News

Abu Dhabi: Compliance to production cuts will be in focus as a historical deal between Opec (Organisation of the Petroleum Exporting Countries) and non-Opec member countries kickstarts on Sunday.

Opec members and countries from outside the group have agreed to reduce production by about 1.8 million barrels per day from January 1 to stabilise oil prices.

The 13-member Opec group would be cutting production by 1.2 million barrels per day, whereas non-Opec members led by Russia would be slashing output by 558,000 barrels per day.

This is the first time in 15 years that Opec and non-Opec members struck a deal to rebalance oil markets, which went through tumultuous times in the last two years due to over-production and weak demand.

From more than $110 per barrel in 2014, oil prices dropped to less than $30 per barrel in January last year before recovering in later months as oil-producing countries made efforts to limit production.

Oil prices settled slightly lower on Friday, the year’s last trading day, but attained their biggest annual gain since 2009 with US crude West Texas Intermediate trading at $53.72 a barrel, down by 0.1 per cent, while global benchmark Brent fell 0.1 per cent to $56.82 a barrel.

“As we stand at the cusp of 2017 we find an oil market in much better shape with the rebalancing process expected to pick up speed into the early part of 2017. Market reckons producers will deliver necessary production cuts,” Ole Hansen, head of commodity strategy at Saxo Bank told Gulf News.

“US producers are likely to respond to higher prices by increasing production but the speed of the recovery is currently up for debate. Libya presents a risk to prices should they manage to achieve a stability [in production],” he said adding that failure on Opec and Russia’s part to deliver the promised cuts could trigger a 10 to 15 per cent correction on long liquidation.

“The producers know this and they will do whatever it takes to keep the market satisfied, either through delivering the necessary cuts and, if not, through renewed promises about action,” Hansen said.

In a sign of compliance, oil companies from Gulf countries are informing buyers that they are slashing supplies as per the agreement.

Abu Dhabi National Oil Company (Adnoc) announced that it is planning to reduce crude supplies by 3 to 5 per cent from January. Other countries like Saudi Arabia, Qatar, Kuwait, Oman and Iraq have also announced cuts to their production.

Mihir Kapadia, CEO of London-based Sun Global Investments, said the commitment of the individual members around their existing market share and demand has to be closely monitored as the deal comes into effect.

“For instance, though Iran has agreed to reduce its output by 210,000 barrels per day, the country has struck new deals with Asian customers including China and India to increase its sales.”

There are also doubts on how different oil producers reorganise themselves once the supply-demand deficit emerges.

In the case of Iraq, when it takes the cutback in January, its current customers, especially in Asia, could face a deficit, which would need to be supplemented by other producers.

“Such instances can lead to market poaching and fierce competition, which may threaten to break the deal or spiral down the prices further. Until we get further evidence on the feasibility of the deal, oil won’t sustain above the $55 mark for long,” Kapadia told Gulf News by email.