In the run-up to the OPEC meeting in Vienna on 30 November, speculation is rife as to whether agreement will be reached on the implementation of the production cut agreed in Algiers in September, with most analysts expecting some form of cut to be confirmed
The IEA in its monthly report for November comments, “We estimate that OPEC members pumped 33.8 mn bpd in October, well in excess of the high end of the proposed output range. This means that OPEC must agree to significant cuts in Vienna to turn its Algiers commitment into reality.
“If the OPEC countries do implement their Algiers resolution the resultant production cut will see the market move from surplus to deficit very quickly in 2017, albeit with a considerable stock overhang that will take time to deplete. On the other hand, if no agreement is reached and some individual members continue to expand their production then the market will remain in surplus throughout the year, with little prospect of oil prices rising significantly higher. Indeed, if the supply surplus persists in 2017 there must be some risk of prices falling back.”
Jadwa Investment, in its latest macroeconomic update, comments that if there is no clear agreement to cut, significant downward pressure on prices will occur, quite possibly pushing Brent towards US$40/bbl.
An agreement to cut to 32.5mn bpd and disciplined implementation could push Brent oil prices up to US$60/bbl, but also result in a rebound in US shale, the investment company says, with the largest sustained increase in US oil rigs in two years already being observed.
It adds that a “multitude of issues” will have to be resolved, with Nigeria, Libya, Iran and Iraq all seeking exemptions from cuts.
“The major challenge for OPEC … will be trying to accommodate the exemptions of all or some of the above countries but, at the same time, implementing an equivalent or higher cut in production from other OPEC members,” says Jadwa.
Also critical is the extent to which non-OPEC members will join production cuts, with Russia pumping at a record rate, although it is reported to have agreed to freeze production at current levels.
