On Sunday January 22 OPEC and non-OPEC producers including Russia announced what looks like a credible mechanism for monitoring the production cuts that these nations agreed in December.
And Saudi Arabia’s oil minister said that with better than expected compliance so far in January, there might not be any need to extend the production cuts beyond their May expiration. That would, calculations by Bloomberg and the International Energy Agency say, leave about two-thirds of the current supply glut in place.
OPEC’s five member monitoring committee–Saudi Arabia, Kuwait, Qatar, Algeria, and Venezuela–meeting with counterparts from Russian and Oman, reported that it had agreed on a mechanism for making sure nobody cheats on the production cuts. The committee will assess data submitted by each producer country plus information from sources such as IHS Cambridge Energy Research, Argus Media, and the International Energy Agency to evaluate compliance. Countries have already cut oil supply by 1.5 million barrels a day, more than 80% of their target, Saudi Arabia’s Minister of Energy Khalid Al-Falih asserted. The goal of the December agreement was to reduce production by 1.8 million barrels a day from the market for six months. Russia, the largest non-OPEC producer involved in the agreement has cut production by 100,000 barrels a day. That’s a level of reduction that Russia hadn’t expected to meet until February, Russia’s oil minister said. Russia’s target is a 300,000 barrel a day reduction by April or May.
As of 11:50 a.m. in New York, U.S. crude benchmark West Texas Intermediate was up 2.04% to $52.42 a barrel. International benchmark Brent was off 0.34% at $55.30 a barrel.
You can almost always count on OPEC to send out contradictory signals, however, and Sunday was no exception. Saudi Energy Minister Al-Falih said that OPEC is on track to end production cuts by the middle of 2017. By that point, he said, cuts by OPEC and Russia will have ended oversupply in world crude markets.
A mid-2017 end to the cuts, however, would leave a major supply overhang intact by the end of the year. OPEC’s goal, the organization has said, is to drain a 300 million barrel global inventory excess by the end of 2017. Ending production cuts by the middle of 2017, however, would leave about two-thirds of that surplus in place, the International Energy Agency and Bloomberg calculate.
Adding to the difficulty in reaching OPEC’s goal of ending the supply glut by the end of the year, U.S. producers look to be increasing their production. The U.S. Energy Information Administration raised its forecast for 2017 domestic production to 9 million barrels a day from the 8.78 million barrels a day the agency had projected in December. U.S. drillers added 29 oil rigs last week according to Baker Hughes. That’s the biggest gain in the rig count since April 2013.
U.S. oil producers have added to hedges to protect against any drop in prices. Short contracts used to hedge prices rose to 677,479 contracts, the most since 2007.