OPEC is likely to bring the oil market into balance by the middle of next year, but its production cut looks set to fall short of its stated goal of draining the stockpiles that are depressing prices, Bloomberg reported.
The oil market will rebalance “toward the middle of next year," according to Nigeria’s Minister of State for Petroleum Emmanuel Kachikwu, bringing an end to more than three years when supply exceeded demand. However, Bloomberg News calculations based on OPEC data show that across the whole of 2017 there will be little overall reduction in record oil inventories -- even if the group convinces non-members to join supply curbs at a meeting on Saturday.
“Even with 100 percent compliance from both OPEC and non-OPEC producers global stocks are unlikely to fall in the first half of 2017," said Tamas Varga, analyst at brokerage PVM Oil Associates Ltd. in London. “That should keep oil prices in check.”
Crude prices could rise to $60 to $70 a barrel if the Organization of Petroleum Exporting Countries succeeds in bring inventories back to a normal level, Venezuelan Oil Minister Eulogio del Pino said last week, echoing a widely held view within the group, from Saudi Arabia to Iran. The portents for achieving this are mixed.
OPEC’s track record shows the group only delivers 80 percent of promised cuts. While Russia has pledged to come to the party and lower output by 300,000 barrels a day in the first half of 2017, other non-OPEC producers, such as Mexico, Azerbaijan and Colombia, are likely to dress up involuntary production declines, already factored in by traders, as cuts. That scenario would leave largely unchanged the 300 million-barrel global stockpile surplus Del Pino and his colleagues are targeting.
OPEC has said its agreement will accelerate the decline of global stockpiles and an optimistic Bloomberg scenario shows the call on the group’s supply exceeding its output by 1.2 million barrels a day in third quarter. That depends on full compliance by OPEC members and for Russia to make good on its pledge, even as other non-OPEC producers make little contribution.
The analysis of the market re-balancing by Bloomberg News is based on OPEC’s own estimates and projections of crude supply and demand adjusted for potential scenarios of cooperation from Russia and other non-OPEC countries. Other consultancies and agencies have different views.
The International Energy Agency expects the re-balancing will happen early next year, while consultants at Rystad Energy expect a 1.26 million barrels-a-day deficit in the first quarter of next year if Russia is the only non-OPEC country to join the effort.
Assuming OPEC will stick to its promise could be wishful thinking. Ali Al-Naimi, former Saudi oil minister, said last week that the oil-club members “tend to cheat.”
As long as Russia makes a genuine output cut, OPEC is ready to accept that other non-OPEC nations pledge natural declines for a large chunk of their production cuts, according to people familiar with the talks, who asked not to be named because the discussions are private. That will mean the re-balancing will take longer.