The strategy between Opec and non-Opec members to cut production is helping to prevent the ongoing oversupply in the markets, but increased inventories from outside is undermining their efforts, analysts said.
“The problem that Opec faces, and will continue to face, is that increased inventories from nations that produce oil outside of the Opec and non-Opec member agreements, will offset the contribution that Opec is making to limit the oversupply in the market,” Jameel Ahmad, Vice President of Corporate Development and Market Research at FXTM told Gulf News.
Thirteen members of the Opec and eleven non-Opec members agreed to cut production by about 1.8 million barrels a day to prop up oil prices in December last year.
The deal came into effect on January 1 and was extended for another nine months till March 2018 to remove the glut and rebalance oil markets.
Oil prices rebounded from early $40s per barrel to $50s currently due to the agreement.
“Another extension to the production cut will need to be announced at some stage, otherwise there is a risk that investors will price heavy declines into the oil markets. This would obviously represent bad news for Opec, and this is something that the group would prefer to avoid.”
“Unless there is a significant shift in terms of oversupply in the market, i.e. a decline in production, the prospect of the price of oil advancing any higher than $55-60 per barrel in 2017 is slim.”
Echoing similar views, Mihir Kapadia, CEO and founder of Sun Global Investments in London said a sense of order was brought into the market by Opec but the persistent glut is undermining the group’s efforts to rebalance oil markets.
“Had there not been such a measure, we could have seen the haphazard production leading to a massive glut and plunging the commodity below $30 (per barrel),” he told Gulf News by email.
Kapadia however underlined the importance of compliance to make the deal successful and reduce the oversupply.
“Despite best efforts, there have been a few line crossings from the members which contributed to an increase in production figures. These numbers are the main contributors which make or break the oil market prices — and previous signs of increasing production data has dipped the commodity’s prices.”
Opec producers like Iraq and the UAE have shown relatively low compliance with the deal while non-Opec Kazakhstan and Malaysia have been boosting output in the last few months, according to latest reports.
At a meeting in Abu Dhabi earlier this month, Opec stressed on the compliance and asked Opec and non-Opec oil producers to fully comply with the deal to boost oil prices in the coming months.
“If Opec members once again go for a haphazard production, we will see an increased glut which will pull down the prices back to square one, if not even farther down. Therefore it would be necessary for some sort of production understanding to be formed, such that it is representative of the market demand. Only then, we will see a long term growth in the prices.”
“It would be even better if Opec and the US producers undertake some sort of dialogue to potentially join hands in balancing the market. At present Opec is at it alone, and it is not fair on them to be expected to balance the markets.”
On the outlook for oil prices, he said the commodity’s chances to break $60 by the end of the year looks very bleak.
“The commodity is still under extreme pressure in the short term due to the oversupply in the market. Outside of the Opec, the US has been the largest contributor to the friction, as its increased production is now finding its way to newer customers in Asia including India, South Korea, Japan, China, Thailand, Australia and Taiwan.”
“The rise in US Crude demand in Asia comes at a time when countries are seeking to diversify their oil imports from other sources after the Opec cuts drove up prices of Middle East heavy-sour crude.”