With the deal now done, we seem to be witnessing history in the making. But remember: history always repeats itself. When two agreements were signed in the early 2000s, both collapsed due to the inability of OPEC members to adhere to their commitments. Hence, the chance of the deal dying an early death is all too real. One of the factors that will bridle prices in the near future is the rate at which global stockpiles will deplete. My previous article explored the different factors that may spur U.S. Shale production. On the 10th of December, OPEC successfully convinced the NOPEC producers to curb oil production next year. But another factor, the most sensitive and uncertain one, is the adherence to the deal. If producers do not see any significant change in prices, the situation will inevitably deteriorate. That is why the first 6 months, after which there will be another meeting to check the results, are going to be very significant.
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As per the agreement, NOPEC producers have agreed to cut 558,000 barrels a day and OPEC producers will cut 1.2mbpd. Saudi Arabia will take the biggest share of this, cutting 486,000 barrels per day. Russia will contribute 300,000 barrels per day to the total NOPEC production cut. All this amounts to 2 percent of global supply. Azerbaijan, Oman and Mexico will also contribute, reducing production by 35,000, 40,000 and 100,000 barrels per day respectively. In reality however, producers like Mexico, which is set to experience “natural declines”, are going to sell these declines as a cut. A natural decline is the drop in yield as a field age with time.
“The use of natural decline as part of the non-OPEC deal is likely to dampen its impact.” An article in Bloomberg reports.
The contributions from a majority of producers are not particularly significant, which means the burden of success will likely fall on the two main players, OPEC’s de facto leader Saudi Arabia and Russia. Both have touched a record high production level in the past month. The figures were released soon after the countries agreed for a deal on November 30th.
Many analysts believe that, excluding the deal, the rate at which the stockpiles will deplete throughout next year will not be enough to bring equilibrium to the global market given the continuing production of U.S. Shale oil.
“That scenario would leave largely unchanged the 300 million-barrel global stockpile surplus..,” reports Bloomberg.
The Wall Street Journal also commented that, “Oil-market analysts said prices wouldn’t go up if many of the cuts were from countries where production is expected to fall anyway.”
Additionally, the perceived fickleness of the de-facto leader of OPEC is always hovering over the deal. As I mentioned, if either Russia or Saudi Arabia do not see any significant change in prices, the deal may fall apart. It is important to note that Saudi Arabia, desperate for a deal to halt the falling oil prices that continue to add to its $98 billion of deficit, may not be able to reach its fiscal break-even point of $79.90 in order to balance its budget. As production falls, the breakeven point will creep upward threatening the Kingdom’s commitment.
As noted by one industry observer, U.S.-based energy consultant Rex Preston Stoner of HUB International, former Saudi Oil Minister Ali al-Naimi had dryly commented at a Washington DC symposium last week that OPEC members “tend to cheat” and therefore any tangible results from today’s agreement “remain to be seen.”
But, for now at least, circumstances are promising. Global stock and commodity markets are up and investors are reaping the rewards with this weekend’s assurance by OPEC and NOPEC producers that they will cut production. But leaving assurances, promises and a formal deal to the side, each country’s need to maximize its income from crude oil production is one thing, but rebalancing the global market for crude is something altogether different.
This article is provided courtesy of Oilprice.com.