New Survey Indicates OPEC Cutback Deal Has 82% Compliance, but Crude Prices Still Fall in January

Rising inventories are widely viewed as the main impediment to OPEC's objective of higher prices.

A Reuters survey, based on shipping and flows data plus information from oil companies and the Organization of the Petroleum Exporting Countries (OPEC), indicates that oil production under OPEC's cutback agreement fell by over 1 million barrels per day (bpd) in January; but the initiative has so far failed in its prime objective of significantly boosting prices.

The cartel agreed starting January 1 to cut output by about 1.2 million bpd to prop up prices and reduce the global supply glut, and Reuters has found that the 11 nations participating in the deal (including non-member Russia) have cut production by 958,000 bpd, which is an 82 percent compliance rate and higher than the 60 percent compliance achieved when a similar deal was enacted in 2009.

But concurrent to these findings being released Tuesday, U.S. light crude settled 18 cents per barrel higher at $52.86 to close January as the first monthly decline - of 1.7 percent - since October.

The reason for the loss continues to be concern over U.S. supply, which a Bloomberg survey prior to a Wednesday release of an Energy Information Administration report believes has expanded once more, by 3 million barrels last week.

U.S. oil production has risen by 6.3 percent since last July to almost 9 million bpd, and Goldman Sachs estimates that year-on-year production "will rise by 290,000 bpd in 2017" if backlogged rigs become operational.

Carl Larry, director of oil and gas at consultant Frost & Sullivan in told Bloomberg, "We were trading on the dollar earlier but attention is now shifting to inventories.

"Inventories are probably going to be strong because we're going into maintenance season."

Haider al-Abadi, prime minister for Iraq, said prices will not reach "levels desired" by his country before the end of 2018 or 2019; meanwhile, Tim Evans, energy futures analyst at Citi, noted that "Direct oil market fundamental news seemed more mixed, with Iran claiming output in line with its OPEC agreement when the production level cited was still more than 100,000 bpd above its target and U.S. refiners still shutting more units for planned maintenance work."

In other words, compliance may ultimately mean little for cutbacks that critics have long argued are far too minuscule to positively impact either the global glut or prices.

Tuesday's market performance and the prospect of inventory builds also do nothing to support the claims of various experts - most notably OPEC cutback participants - that prices will increase substantially in the near future.

Typical is the comment made last week by Emmanuel Kachikwu, minister of state for petroleum for Nigeria, who told Bloomberg the cartel's initiatives are enough to rebalance the market and trigger higher prices: "Ultimately, the effects over the next few months will get us to where we want to be, which is in the mid-$60s."