How Long Can Oil Producers’ Output Cut Support Oil Prices?
Crude oil prices and major oil producers’ output cut plans
- OPEC (Organization of the Petroleum Exporting Countries) agreed to reduce crude oil production by 2 MMbpd (million barrels per day) to ~32.5 MMbpd.
- Non-OPEC producers agreed to reduce crude oil production by 0.6 MMbpd starting in January 2017.
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However, markets are getting skeptical about whether major producers will comply with their cut quotas. As a result, crude oil prices fell 3% in the last week. In the past, OPEC producers haven’t followed the quota system strictly.
Crude oil production cuts from major producers will continue for six months starting in January 2017. In January 2017, Saudi Arabia’s energy minister said that OPEC might not extend the production cut deal beyond six months. He thinks that the oil market’s rebalancing will end by 1H17.
If there’s a delay in the rebalancing, we might see production cuts continue for another six months. Difficulty in monitoring oil producers’ production levels will be a key challenge. Changes in supply and demand impact crude oil (FENY) (XES) (RYE) prices. For more on crude oil prices, read Part 1 of this series. Read How the Major Oil Producer Output Cut Plan Could Fail to learn more.
Impact of the production cut deal
Market intelligence company BMI Research estimates that OPEC and non-OPEC producers’ overall compliance with production cuts would be 73%.
Production cuts could reduce crude oil oversupply and support crude oil prices in 1H17. However, high crude oil prices could cause a rise in crude oil production in countries such as the US and Canada in 2017. The expectation of a rise in production from Libya, Iran, and Nigeria could also pressure oil prices. For more on US production read Part 4 of this series.
For more on crude oil prices, read Oversupply Concerns Have Taken a Toll on Crude Oil, What Can Investors Expect in the Crude Oil Market in 2017, and US Election: How Will It Impact the Stock and Energy Markets.
Read Will Crude Oil Prices Test 3 Digits Again and Why Is the EIA Bullish on Crude Oil Prices in 2017 and 2018? for more on crude oil price forecasts.
For more industry analysis, visit Market Realist’s Energy and Power page.