Abu Dhabi: The oil market is set to move higher in the short term following the deal between Opec and non-Opec members on Saturday, but there are plenty of challenges that oil-producing countries will have to overcome, analysts said.
In an agreement on Saturday, countries from outside the Opec group have agreed to cut production by 558,000 barrels per day starting from January 1. Russia will be sharing the most with a cut of 300,000 barrels of oil per day.
This is in addition to 1.2 million barrels of oil that Opec members have agreed to slash last month.
Oil prices have rallied by more than 15 per cent when Opec announced on November 30 that it would be slashing production by 1.2 million barrels per day from next year.
Brent, the global benchmark, was trading at $54.33 per barrel, up by 0.82 per cent, when markets closed on Friday.
“The improved technical outlook has left the market with a bullish bias and in the short term, the market has the potential to move higher. The higher it goes, the bigger the risk of a sharp reversal remains, once a lack of compliance from Opec or positive production news from the US shale oil industry begins to emerge,” said Ole Hansen, head of commodity strategy at Saxo Bank.
He said Opec has a poor record when it comes to complying with its own production targets and this could be made even more difficult considering the rising production seen from Libya and Nigeria, both exempt from cutting production. “In November, they [Nigeria and Libya] raised production by a combined 140,000 barrels per day, with Nigeria looking to add an additional 400,000 barrels per day before February. These developments continue to leave many sceptical about the additional upside potential for oil at this stage.”
An additional source of supply over the coming months could come from storage on land and at sea as the economics behind such strategies evaporate, he added.
Tens of millions of barrels could be released into the market over the coming weeks and months limiting the price jump from Opec’s supply curbs.
Dr Mamdouh G Salameh, an oil economist in London, said both Opec and non-Opec camps will do their utmost to abide by the cuts as all of them without exception have vested interest in higher prices but agreed that they have a reputation of not abiding by their production quotas when their budgets needed more money.
According to the consultancy IHS Markit, Opec and non-Opec nations will be tiptoeing towards the lowered target in 2017 rather than leaping towards it.
“This (non-Opec deal) doesn’t mean much until country-by-country cuts are published. So far, we only know Russia promises up to 300,000 barrels per day. Certainly, Russia was vital to achieving the main Opec deal, and will be a cornerstone of any non-Opec cuts,” Spencer Welch, Director at IHS Energy and an Opec expert, told Gulf News.
“But it is hard to imagine which other non-Opec countries will actively cut unless natural declines are counted,” he said, adding that the deal would help support price but it is unlikely to take oil back above $60 per barrel.
