OPEC Compliance Boosts Oil Market
According to the recently published data by the oil cartel, OPEC members have demonstrated strong conformity with the production cut agreement.
This confirmation marks a significant milestone for OPEC, which was compelled to create a plan for price recovery after the barrel price plummeted to $26 in February 2016.
The collapse in prices, the lowest since 2003, resulted from an oversupply, reduced Chinese demand, and the lifting of Iran’s nuclear sanctions by Western nations.
However, the market has experienced a remarkable turnaround, with crude prices doubling to $53.50 per barrel.
Here’s how major oil producers collaborated to increase prices:
OPEC’s Production Cut Deal
OPEC’s collective decision in November to reduce production served as an attempt to address the global oil oversupply and stabilize prices.
The announcement of the deal immediately resulted in a 9% price increase.
Investor sentiment improved further when non-OPEC producers, including Russia, Mexico, and Kazakhstan, joined the agreement to limit supply.
The agreement has proven to be successful. The latest OPEC report shows that its members have, for the most part, adhered to their commitments to cut production. The International Energy Agency (IEA) also noted OPEC’s compliance at 90% for January.
The UAE energy minister, Suhail Al Mazrouei, expressed his satisfaction with the results, stating that they exceeded his expectations.
The production cuts amount to 1.8 million barrels per day and are scheduled to continue for six months.
Optimism among Investors
The lengthy negotiation process for the OPEC deal resulted in a record number of hedge funds and institutional investors betting on higher prices in January.
This widespread optimism is contributing to the upward movement in prices.
Growing Demand
Recent data from OPEC and the IEA reveal that global oil demand in 2016 exceeded expectations, driven by robust economic growth, increased vehicle sales, and unseasonably cold weather in the last quarter of the year.
Demand is projected to continue growing in 2017, to an average of 95.8 million barrels per day compared to 94.6 million barrels per day in 2016.
The IEA predicts that if OPEC maintains its commitment, the global oil surplus that has plagued the market for the past three years will finally diminish in 2017.
Future Challenges
Despite the impressive growth, analysts caution against expecting significantly higher prices.
This is because higher oil prices are likely to lure American shale producers back into the market. The number of active oil rigs in the U.S., as reported by Baker Hughes, has increased by 152 rigs compared to a year ago, totaling 591.
The OPEC report reveals that U.S. crude stockpiles surged in January to nearly 200 million barrels above the five-year average. Fiona Cincotta, an analyst at City Index, attributes this inventory surge to strong output from U.S. shale producers, who were not part of the OPEC agreement, but took advantage of the resulting price rally.
The potential increase in supply could once again put OPEC under pressure.
CNNMoney (London)
First published February 13, 2017: 9:13 AM ET
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