Cut in oil production won’t immediately end world glut

‘Market has to take a lot on faith’ that producers’ agreement will reverse oversupply

The first half. No, the second. Certainly this year. Or next. That's the range of views you'll hear if you ask the International Energy Agency (IEA), Opec, Saudi Arabia and the US government when last week's announced production cuts will end the global oil glut.

The December 10th agreement between Opec and 11 other producers could begin to reverse three years of oversupply within the next six months, according to the IEA, Paris-based adviser to 29 industrialised nations. Opec itself is less hopeful, predicting that stockpiles won’t fall until the second half of 2017.

Khalid al-Falih, energy minister of Saudia Arabia, Opec’s biggest and most influential member, was less precise than either institution on Wednesday, saying that he sees supply and demand aligning at some point next year, without specifying when.

Maybe later rather than sooner, according to the Energy Information Administration, a unit of the US department of energy. Its latest market outlook, on December 6th, projected that inventories will accumulate by an average 420,000 barrels a day next year.


“Given the paucity of timely supply data, the market has to take a lot on faith,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas in London.

Joint barrel cut

Opec and 11 other producers, including Russia and Kazakhstan, agreed to jointly cut output by about 1.8 million barrels a day from January in an effort to end a three-year surplus that has battered the economies of the world’s biggest oil companies.

While prices have climbed, the rally may be losing momentum as traders question how far producers will comply with the deal and when it will disperse an inventory surplus of more than 300 million barrels, enough to supply China for almost a month.

Behind the opposing views on when the market will rebalance are differing estimates of global oil demand. Opec sees total consumption averaging 95.6 million barrels a day in 2017. The Energy Information Administration anticipates 97 million barrels a day. The IEA predicts 97.6 million.

They also disagree on how much oil non-Opec nations will produce; Opec forecasts 56.5 million barrels per day; the IEA says its 57 million.

The difficulty of forecasting oil supply and demand on a global scale is underscored by the major agencies’ inability to even agree on how much oil the world used last year.

There’s a gap of about 1.6 million barrels a day between the 2015 demand estimates of the IEA and Opec, which is roughly equivalent to all the crude pumped each day by Opec member Nigeria.

On Wednesday, Opec signalled a growing oil surplus next year unless members curb output from record levels and outside producers deliver on cutback pledges made at the weekend.

First cut since 2008

Opec’s own figures show the group’s output has continued to rise, adding to a global glut, ahead of the January start of its first supply cut agreement since 2008. This could raise questions about its ability to comply fully with the deal.

Still, Opec was hopeful that supply curbs pledged by Russia and other nonmembers, in addition to its own reductions, will tackle the surplus and support prices, which at $55 a barrel are still half the level of mid-2014.

The non-Opec cuts should help to “accelerate the reduction of global inventories and bring forward the rebalancing of the oil market to the second half of 2017”, Opec said in the report.

To speed it up, Opec last month finalised a plan to cut output by about 1.2 million barrels a day from January 1st, to 32.50 million daily. On Saturday, nonmember countries pledged curbs of around 560,000 barrels per day in the first such move since 2001.

– Bloomberg/Reuters