Outline of The Deal
Well, maybe we got a Christmas Miracle. In a ‘historic’ deal eleven countries agreed on Saturday, December 09, 2016, to cut their output along with OPEC in a further effort to bring oil markets into balance. Between these 11 countries and OPEC, they represent more than half of the global oil production.
The deal will take effect in January 2017, and is supposed to continue for six months. I would note as an aside, that according to the Saudi Oil Minister, this is when markets would have reached balance without OPEC intervention. Whether that is true or not, remains a matter of opinion and speculation so it is, at best, an educated guess.
Regardless, as you may recall, on November 30, 2016, OPEC members agreed to slash production by 1.2 million barrels per day beginning in January, taking their total ouput to 32.5 million barrels per day. The lion’s share of the cuts are to be born by Saudi Arabia and its direct military and political allies. OPEC had asked non-OPEC members to contribute 600,000 additional barrels per day.
Under the terms of the agreement reached last week, 11 countries agreed to total cuts of 558,000 bpd. Previously, Russia had agreed to meet half the desired cuts itself. The additional countries and the barrels per day they agreed to cut are as follows:
Kazakhstan – 20,000 bpd
Mexico - 100,00 bpd
Oman - 40,000 bpd
Azerbaijan - 35,000 bpd
Also joining the deal and agreeing to cuts were Malaysia, Bahrain, Equatorial Guinea, Sudan, South Sudan, and Brunei.
In order to enforce the deal, a monitoring committee will be set up comprised of three OPEC members and two non-OPEC members.
The Russian Problem
Not to be the bearer of bad news amongst what is great news for our industry, there are inherent risks. First, is Russia. Russia agreed to shoulder half the production cuts, but post-meeting, seemed to indicate that their cuts would be closer to 200,000 barrels per day which brings the actual number down to 458,000 bpd. Not insignificant, but perhaps shows a fault line. And Russia is an even bigger problem than that. In both 1999 and 2002, Russia agreed to production cuts but did the exact opposite and actually increased production going against their word. Several analysts have said that Russia’s “cut” is more just a natural production decline that is somewhat already factored into estimates of world oil demand/supply.
The Other Good News
Speaking after the meeting, Saudi Arabia’s oil minister stated that the Kingdom is prepared to cut production even more than the 500,000 bpd than it agreed to in the accord reached on November 30th. While analysts have different opinions as to the significance of that statement, it seems to me to be overall positive for markets and should instill confidence in drillers that OPEC will adhere to its end of the bargain.
By: Ty Chapman
Five Star Metals, Inc.
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