High output cut compliance likely

Ramp up in US output, recovery in Libya and Nigeria’s production could pressure deal

Compliance among oil producing countries in cutting output is expected to be high when Opec releases its monthly oil market report today, analysts said.

Thirteen member of the Organisation of Petroleum Exporting Countries (Opec) and 11 non-Opec members agreed to cut production by about 1.8 million barrels a day to prop up oil prices in December last year. This is the first monthly report from Opec since the agreement went into effect on January 1. Opec agreed to slash output by 1.2 million barrels a day where as non-Opec members led by Russia promised to cut 558,000 barrels a day.

“Compliance is expected high, but short of 100 per cent. The key question for the oil market is how long Opec can sustain this deal,” said Spencer Welch, director at IHS Energy in London.

He said while the Opec cuts are promised, Russia’s reduced contribution, which is 50 per cent of the promised non-Opec cuts, will be phased in through the first six months of 2017.

Increase in US production and recovery of oil production from Libya and Nigeria could put the future of the deal into question, he said. “The big questions on the future of the deal remain unanswered. US production is beginning to ramp up and could grab the market share released by Opec. This could put the future of the deal into question. If Libya or Nigeria was able to recover production then this will add further pressure to the deal.”

Oil price jumped by more than 16 per cent since the deal was signed on November 30. Brent, the global benchmark is currently trading at $56.70.

“With the good news on compliance now confirmed, the challenge remains to keep this high level for another five months,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Libya, which is exempted has increased its production from 300,000 barrels a day in August, to about 700,000 barrels a day in recent times due to improvement of the security situation in the country.

The UAE Energy minister Suhail Al Mazrouei also said yesterday that compliance has been high in January and commitment is expected to improve over the next few months.