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September 29, 2016
OPEC Raises a White Flag
The OPEC agreement that was concluded yesterday could stop the accumulation of the oil surplus in 2017.
OPEC production of 32.5 million b/d would allow for the drawdown of stocks, albeit slowly, and no doubt a
steeper trajectory for prices next year. After posing the question of whether the Saudi’s would continue a war
of attrition or opt for a cease fire in its Global Crude Oil Outlook, this agreement looks a bit like a white flag.
OPEC Raises a White Flag
The OPEC agreement that was concluded yesterday promised to cut production to a level between 32.5 and
33.0 million b/d from current production of about 33.2 million b/d. So, the implied cut in output would be up to
700,000 b/d. But, OPEC postponed allocating cuts among the members until November, which means this “deal”
is more an indicator than a production accord. This strategy is somewhat consistent with the conclusions we
reached in our recently published Global Crude Oil Outlook. Simply, that the Saudis (and Kuwait, UAE and Qatar) should wait a few months (early 2017) to better understand Iran’s productive capacity and Nigeria and Libya’s reported progress on stabilizing (lifting) their exports. The willingness of Saudi Arabia to head down this
road may signal that they believe that Iran is already very close to sustainable capacity of 3.8 million b/d.
If this deal turns into a production cut, what does it mean for markets? We estimate that the call on OPEC is
currently around 32.8 million b/d, but will fall to 32.2 million b/d in the first half of 2017 before rising to 33.3 in the
second half of 2017, for a 2017 average of 32.7 million b/d. As a result, OPEC production of 32.5 would stop the
accumulation of the oil surplus in 2017. This would finally allow for the drawdown of crude stocks, albeit slowly.
There is no doubt that it would put crude oil prices on a steeper trajectory next year. Of course, this also means
many producers around the world would benefit from higher prices.
We asked the question in our Global Crude Oil Outlook of whether the Saudis wanted a cease fire or would
continue a war of attrition with the rest of the world’s producers. Yesterday’s agreement looks a bit like a white
flag .
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report are our judgment and are subject to change without notice. No warranty is made or implied. ©2016, ESAI Energy LLC