Crude oil prices and major oil producers’ output cut plans
Crude oil (BNO) (XLE) (ERY) (ERX) prices have risen ~15% since November 2016 due to the expectation that major oil producers’ production cuts would curb oversupply in the market.
- OPEC (Organization of the Petroleum Exporting Countries) agreed to reduce crude oil production by 1.2 MMbpd (million barrels per day) to ~32.5 MMbpd in January 2017. The EIA (U.S. Energy Information Administration) estimated that OPEC’s crude oil production fell by 210,175 bpd (barrels per day) to 33.5 MMbpd in December 2016. OPEC’s production is still 1 MMbpd higher than its production cut target. It’s expected to fall more in January 2017.
- Non-OPEC producers agreed to reduce crude oil production by 0.6 MMbpd starting in January 2017.
Higher crude oil prices would have a positive impact on oil and gas producers’ earnings like ExxonMobil (XOM), Whiting Petroleum (WLL), Hess (HES), and PDC Energy (PDCE).
Major oil producers’ output cut plans
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. Changes in supply and demand impact crude oil (FENY) (XES) (USO) (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 for updates on major producers’ production like Saudi Arabia, Russia, Iran, Iraq, and Kuwait.
Impact of the production cut deal
Saudi Arabia said that 80% of the targeted reduction of 1.8 MMbpd has been implemented in January 2017.
Petro-Logistics reported that OPEC will reduce production by 900,000 bpd (barrels per day) in January 2017. It’s about 75% of the OPEC’s targeted reduction in production.
Market intelligence company BMI Research estimates that OPEC and non-OPEC producers’ overall compliance with production cuts would be 73% in January 2017.
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.
In the last part of this series, we’ll take a look at some crude oil price forecasts.
