Many analysts and investors are insisting that the glut in global crude oil supplies is coming to an end. Throughout the second half of 2016, speculators drove up prices in anticipation of a production cut promised by OPEC (Organization of the Petroleum Exporting Countries).
The oil cartel’s members pumped 33.87 million barrels a day in November, an increase of 150,000 from the previous month. This was despite their promise to slow output.
The amount of oil in storage alone is now near 500 million barrels.
The abundance of oil in the global markets, had allowed prices per barrel of crude, to drop to a low of $26.00 USD (United States Dollar) in February of 2016. To ward off a similar price collapse towards the end of this year and early in 2017, forced Saudi Arabia to finally take action.
At the OPEC meeting beginning November 30th in Vienna, Austria there were doubts an agreement on cutting production within the group, was even possible. This reality was based on the problem of having too many diverse interests among the 14 member nations.
The price for a barrel of crude, remained above $40.00 USD a barrel. Of course, in the absence of an agreement, oil analysts were predicting prices as low as $30.00 USD a barrel or even lower.
To the surprise of many in the industry, an agreement was finally achieved. It was only possible because the largest producer Saudi Arabia, was willing to absorb a larger cut in domestic production than was originally offered. The kingdom will reduce production by 500,000 barrels a day.
Yet, according to Saudi Arabian officials, last month production actually increased an additional 95,000 barrels daily to a total of 10.72 million. The final tally is still in dispute.
The intention of Saudi Arabian government, is to drop their level of exports to 10.06 million barrels a day. It has sold oil above this level since March of 2015. If necessary, the kingdom is willing to go even further, to slow sales below the psychologically important 10 million daily benchmark.
Saudi Arabia alone, is responsible for 17% of the global exports of crude. As of 2015, it was worth a total of $133.3 billion USD annually.
Iraq, Kuwait and the United Arab Emirates, would also absorb a larger portion of reduced crude output.
OPEC worked out a deal that would share a daily output cut of 1.2 million barrels a day. Starting in January, there would be a 32.5 million barrel daily ceiling coming from the cartel.
The problem is a cut of 1.37 million barrels will be necessary, to meet the production cap.
Global prices for crude immediately surged some 9% on the news. The international price was now hovering around $50.00 USD a barrel.
It was the first time since 2008, that OPEC was finally able to agree to trim back on supplies of oil available for sale.
Under the agreement, most OPEC countries will shrink their output by 4.6%.
There were exceptions of course. Nigeria which is fighting an insurgency which has damaged their oil sector will be exempt. Libya in the midst of a civil war, will also be excused from a cap on output.
Iran would be allowed to continue to increase production further, closer to the level that had existed before the international sanctions. These were placed on them, as a result of their insistence on moving forward with their atomic program. These were relaxed after the nuclear agreement reached last year.
Iran insisted on keeping total production near 4 million barrels, which was the daily average before the imposition of the sanctions.
Saudi Arabia finally agreed, that Iran would be allowed to increase their output an additional 90,000 barrels a day. This would boost their overall production, to just below 3.8 million barrel a day. It is important to remember, this is near 1 million barrels above their 2015 daily average. This Iranian spurt was making the global glut in oil far worse.
Iraq dealing with a full scale war in the northern regions of their country, is anxious to raise production again, once the present agreement expires in six months.
OPEC member nations fully recognize, their output of total crude production as a percentage has declined over the years. Total world output of crude exceeded 80 million barrels last year and has remained close to that level, throughout most of 2016.
OPEC controls only about 40% of the global oil market.
This made an agreement to limit crude production of non-OPEC producers paramount, if there was going to be any real progress in reducing the global surplus. If successful, it would be the first time in 15 years, that an understanding with producers outside OPEC had been reached.
OPEC was hoping to convince these nations, to reduce their daily output by 600,000 barrels.
Last weekend, an agreement was finally reached with the group assembled agreeing to a reduction of 558,000 barrels a day. It would be the largest contribution to a production cut ever offered by the non-OPEC nations.
The nations in attendance in the end made the calculation, that they will gain more revenue from higher global prices, than they will lose with lower output.
The most important nation in this endeavor is Russia. It remains the second largest world exporter of oil after Saudi Arabia with 11% of the total. The Russian government agreed to slow exports by the equivalent of 300,000 barrels daily.
Russian production reached a 30 year high last month, at 11.2 million barrels a day. It was forecast that output in Russia was due to rise an extra 80,000 barrels in 2017.
Kazakhstan contributed an additional 20,000 barrels daily to the total reduction agreement. Before the deal, the country projected that production would actually increase 210,000 barrels a day next year. This was thanks to an opening of a major new oil field.
Azerbaijan agreed to a cut of 35,000 barrels and Oman by 40,000. Mexico agreed to a cut of 100,000 barrels. Both Azerbaijani and Mexican production however, will be reduced through a natural decline. This tactic in managing lower output only works over time, as older fields are brought off line.
These kind of tentative agreements by the non-OPEC countries, make the 588,000 daily barrels number seem far less impressive.
The international price for crude surged an additional 4% to 5% on the news. Oil was now selling for over $53.00 USD a barrel in the United States, listed as West Texas Intermediate. The European and more international benchmark known as Brent, was selling for over $56.00 USD a barrel.
It is being estimated that the non-OPEC production cut, will be equal to the anticipated oil demand growth next year in both China and India. Demand in these two markets, is expected to grow at the slowest pace since 2014.
Together OPEC and the non-OPEC nations that have agreed to reduce their level of exports, pump near 60% of the global supply.
The trouble for those countries that want to re-balance the global oil market, is the lack of cooperation from the remaining world producers. Most notably these include Brazil, Canada, China, Norway and the United States.
As OPEC led by Saudi Arabia would like to have crude prices move towards $60 USD, higher world oil prices may have the market effect of encouraging more production. This increased output would come from the nations aforementioned, that are not under agreement.
This is especially the case with shale oil production in the United States. Since the summer, about 25 rigs a month are moving back into operation.
Unlike a year or two ago, where the break even cost for American production was near $70.00 USD a barrel, it is now far lower. It is anywhere from 30% to as much as 50% lower. If the energy sector as a whole, can sustain prices below $50.00 USD a barrel, it will be difficult for OPEC to keep cutting production to match increased output in the United States.
A strengthening dollar now at a 14 year high, also impacts the price of international oil, since energy commodities are traded by use of American currency.
A further concern is the tendency of OPEC members to cheat on the sale of oil, in an effort to raise more revenue. They seem to find ways to get around how their sales is counted. Traditionally, it is by the number of tankers that leave their ports. Some nations that sell some of their output through pipelines, make it far more difficult to track the amount of oil that is actually being sold. This is especially the case with Russia.
One must remember, that all the agreements made thus far are voluntary. It is therefore likely, the current oversupply in crude will continue well into 2017 and beyond.