It may only be the early days, but to the surprise of many, a deal by OPEC members to reduce oil production by 1.2 million barrels per da–and a request that non-cartel producing nations join with a commitment to shave 600,000 barrels per day from their output–seems to be taking hold.
Crude futures have posted marked gains for the second day in a row, taking all petroleum products like gasoline and diesel with it, much to the surprise of critics and the glee of producers. Although it may be too early to tell whether this draft agreement will in fact succeed, a few facts are weighing in on oil and the global petroleum energy price complex.
According to OPEC, member states produced a near record 34.06 barrels of oil daily, up over 1 million since the end of summer 2016. This record is important since it’s that number from which the proposed 1.2 million barrel per day cutback will apply.
First, to assure compliance and prevent cheating by members, independent monitors from Algeria, Kuwait and Venezuela will painstakingly be assigned to member countries to count and inspect production. Second, several member countries facing disruption through war or political instability have been given exemptions from the quota, namely Libya and Nigeria. Third, in order for the reduction in output to be successful (like in 2002), OPEC has reached out to meet with several non-OPEC producing countries–most notably Russia–to secure half of their total daily production reduction. The request for the non-cartel is that they in turn would throttle back production by 600,000 barrels a day. In response, Russia has indicated it will consider a reduction of 300,000 barrels pr day, but wants greater reassurance that OPEC’s quotas are adhered to.
For traders and speculators who’ve seized on this surprising outcome, the details and commitment to adhere to the cuts is only part of the reason why they’ve bid oil up over $5 a barrel in two days and sent gasoline up 18 cents a gallon.
Though the OPEC agreement emphasizes reduction in supply, not necessarily price, the timing of the cartel’s plan to reimpose oil production quotas comes on the heels of two important revelations relation to global consumption indices. The first came in the form of the US Energy Information Agency which found that U.S. oil consumption had increased 2.3% in September compared to the same month a year previous; the second for gasoline consumption which mirrored crude demand with a 2.2% rise in use.
While fuel efficiency and environmental standards continue to promise less demand down the road, a bullish report on manufacturing in China this past week confirmed factory activity is at its highest in over two years and that, fueled by oil, the Chinese economy is poised to continue growing.
With increasing consensus that global demand for oil will increase by about 1.3 million barrels per day by 2018, and the time it will take for U.S. drillers (shale oil) to ramp back up to the million barrels lost in domestic production due to two years of poor economics, a higher price for oil won’t see a quick output to make up for OPEC’s cuts.
OPEC’s deal has many conditions and caveats which may not be easily acheived. But the experiment of flooding the world with oil has clearly backfired with members of the cartel sharing one reality in common: seriously bruised national finances.
For them, despite different priorities and problems, the necessity of restoring the value of the commodity on which their country depends will drive compliance and likely restore the intricate balance between the supply and demand for crude.
The days of devalued oil may quickly be drawing to an end.