Will OPEC Deliver Its Output Cut Deal? Here's How We'll Know

Will OPEC Deliver Its Output Cut Deal? Here's How We'll Know
The promise of production cuts from OPEC and its partners sent oil rallying in 2016. Now traders want proof they're delivering on those vows. It won't come easy.

Once the oil is on the water there’s a range of services dedicated to following its flow, from ship-tracking data compiled by Bloomberg to companies such as Petro-Logistics SA and Oil Movements. Satellite-tracking means these shipments can be estimated almost in real-time.

Still, a drop in exports might not guarantee a change in production, according to the EIA.

“The question of storage is the key unknown when estimating production using export data,” said the EIA’s Villar. “It’s difficult to know how much of the lifted crude each month comes from storage and how much from production in that particular month.”

Furthermore the size of the cuts, at just 4 percent of OPEC’s total output, “is not necessarily enough to have an impact on the number of tankers,” said Olivier Jakob, managing director at consultants Petromatrix GmbH.

Stockpiles

Clearing bloated oil inventories, rather than achieving a particular price, has always been the stated aim of OPEC’s intervention. The group estimates that the world’s tanks are overstuffed by more than 300 million barrels, or enough to satisfy China for almost a month.

Yet if stockpiles are the most important metric, the problem is that they are perhaps the most lagging, with data from the IEA arriving about two months in arrears.

The agency previously assumed inventories wouldn’t drop until the end of 2017. It now estimates that OPEC’s cuts could start to deplete inventories as early as the first quarter, which means data from this definitive gauge would arrive in April or May. OPEC, meanwhile, has said that while the deal will speed up the re-balancing of the global oil market, it won’t result in demand exceeding supply until the second half of the year.

Even if OPEC delivers the cuts promised, there’s still the risk of backsliding if their competitors in the U.S. respond by ramping up drilling, said Chip Hodge, who oversees a $12 billion natural-resource bond portfolio as senior managing director at John Hancock in Boston.

"If activity picks up dramatically here, it might push other producers into cheating because of what that means for prices," he said.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net ;Mark Shenk in New York at mshenk1@bloomberg.net To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net Reg Gale, Stephen Cunningham


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Tim Albus  |  January 06, 2017
Let's just hope the jackass yanks don't screw this up like last time. Keep production at a fair level, where everybody gets a slice of the cake. I understand that Americans have a hard time understanding FairPlay and integrity, but if we don't want another bs slowdown, you greedy pigs had better learn from past mistakes.


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