OPEC Crude Cut Could Push Oil to $75 Per Barrel in 2017

OPEC Crude Cut Could Push Oil to $75 Per Barrel in 2017
OPEC agrees to slice its oil production by more than 1 million barrels per day beginning Jan. 1, raising market hopes and commodity prices.

Following months of global oil market angst, OPEC has pledged to cut its production by almost 1.5 million barrels per day (MMbpd) – a greater target than proposed when the cartel last met in Algeria.

This first OPEC accord in eight years is designed to accelerate the rebalancing of a market that has shown some signs of tightening. Inventories could reach equilibrium in as few as six months, analysts say.  

Critically, analysts at Barclays said in a research note, market participants may price this into their calculations before the actual inventories drop.

Barclays said that as a result, oil prices could increase with the emergence of evidence that the market is truly tightening.

“This is not to say that the current environment is easy for the industry – it isn’t – but with OPEC back and effective … it does appear that the worst of the downturn has passed.”

Details Of The Deal:

  • OPEC will reduce its production to 32.5 MMbpd – about 200,000 bpd more than initially proposed.
  • Saudi Arabia will cut the most – about 40 percent of the total – which comes to 500,000 bpd.
  • Iraq will adjust down by 210,000 bpd.
  • Russia, coy throughout the discussions, appears to have come onboard with a cut of 300,000 bpd.
  • No specifics on waivers for Libya or Nigeria. Indonesia suspended its OPEC membership.
  • The deal begins Jan. 1 and runs fox six months. Production levels will hold if market conditions dictate it.
  • A meeting Dec. 9 will confirm non-OPEC participation.

The bottom line is this: A chop of almost 1.5 MMbpd to volumes will get inventories down to normal levels by next summer, which would grow confidence that oil could price at $75 per barrel in 2017, David Pursell, Tudor Pickering Holt & Co. managing director, told investors.

What matters most about the arrangement, Pursell said, is in its suppositions. The Organization for Economic Cooperation and Development (OECD) inventories will return to normal in the third quarter 2017 – if the deal holds. Oil prices will respond quickly to OECD inventory declines. And, OPEC assigned a ministerial committee to monitor implementation and ongoing volumes.

“Compliance should be high, but naysayers will suggest OPEC will cheat,” Pursell said. “History suggests that compliance is high initially and does erode over time as oil prices increase.”

Vienna Sentiment

The International Energy Agency has estimated that as a group, OPEC currently produces 33.8 MMbpd. In the September meeting in Algiers, the cartel said member nations would target dropping that volume between 32.5 MMbpd and 33 MMbpd.

Designed to boost the oil market’s recovery, the production drop will “accelerate the ongoing drawdown of the stock overhang and bring the oil market rebalancing forward,” OPEC said in a statement Nov. 30.

World oil demand is expected to grow by about 1.2 MMbpd this year and in 2017. OPEC said that underscores that a market rebalancing is underway, but both Organization for Economic Co-operation and Development (OECD) and non-OECD inventories remain well above average. Given the inventory overhang, a lack of investment in 2016 and 2016, as well as massive industry layoffs, OPEC said it’s vital that stock levels are brought down.

Is OPEC Back – Or – Did It Ever Leave?

Criticism of OPEC and early decision to let the market work it’s will and rebalance itself had reached a pitch that questioned whether the 56-year-old organization could be relevant in the post-shale revolution market. That answer is mixed, but largely, affirmative.

“Two years later a much more cohesive OPEC has re-emerged as a force prepared to call upon non-OPEC as well,” Barclays said.


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shahbaz Ur Rehman  |  December 04, 2016
I agree with bill
Rob Bruckner  |  December 02, 2016
This cut of a million barrels will be made up from the U.S ,Canadian and African producers.This is good for a short term spike in prices however this oil will and can be replaced immediately once the price spike does hit 75 dollars per barrel.Opec is just going to loose market share.They will be hit one way or another.Cannt say I feel sorry for them.
Courtney Isselhardt  |  December 02, 2016
What about Nigeria, Libya, Iran (increasing about 300,000BOPD) and Iraq said they would not cut yesterday. These alone will cancel the OPEC cut. I would wait and see what happens over the next 6 months to a year. If the oil price goes to $60.BO the US shale production will increase rapidly and well have another glut. A lot of ifs have to be answered!
Bill  |  December 02, 2016
It could push it to $75, But it wont. Billions spent buying Permian Basin acreage means billions in drilling and completions. Which means millions of barrels of crude oil coming into the market. Storage tanks will fill through the winter, as usual, affecting price. Basic supply and demand functions are still in play, despite one bit of news that may, or may not, have any effect on oil prices. OPEC agreement merely prevents the price from falling to $25 per barrel through the winter.
john weaver  |  December 01, 2016
As OPEC cuts Texas opens the valves. Nothing changes much as far as the price. We need to reduce our imorts and get oil to $65/BBL

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