OPEC Deal Could Cut Glut in Half - but Critics Think It's "Unsustainable" and Will Benefit U.S.

Bloomberg calculates that the record 300 million-barrel surplus that has been building since 2014 will be cut almost in half by mid-next year

If the Organization of the Petroleum Exporting Countries (OPEC) and 11 other producers abide by the recently ratified supply cut agreement – and analysts say this is a big "if" – then the record 300 million-barrel surplus that has been building since 2014 will be cut almost in half by mid-next year, according to Bloomberg calculations.

Bloomberg estimates that the inventories will decline by about 760,000 barrels per day (bpd); however, this assumes OPEC will fully implement its 1.2 million bpd cut and Russia will follow through with its promised 300,000 bpd cut – and critics think the former is unlikely due to rising production from Libya and Nigeria, which are exempt from the deal.

As for the latter, many think Russia will go back on their word if U.S. shale production increases due to rising oil prices generated by the cutbacks.

The latest critic to doubt a happy outcome is Barclays, whose analysts said in a note, "There are too many moving parts for OPEC's new policy to be sustainable in the long term: the strategy is bound to overshoot in our view, leading to lower prices in the second half of next year."

The moving parts include the fact that of the 11 non-OPEC producers nations, eight have mature oil fields that will decline naturally — and consequently, some investment banks have not adjusted their forecasts to account for these producers.

Barclays also pointed out that the production figures OPEC members provide can't be trusted, with third parties arriving at their figures partly by estimating how much crude they are refining into fuel, and then adding that estimate to net exports.

The bank argues that under this system, producers can appear to cut production while actually holding it steady by under-reporting refinery activity and tinkering with the mix of petroleum products they export.

Meanwhile, Goldman Sachs thinks Russian cuts might come from a higher-than-expected October output and merely consist of gradual reductions inching toward 200,000 bpd, with the total cut coming only by the second half of 2017.

But most importantly, Macquarie analysts think U.S. production increases as a result of the OPEC deal, and viewed by OPEC as minimal, will "be massive" according to their modeling; indeed, the U.S. Energy Information Administration's drilling productivity report shows January production edging up 1,400 bpd to 4.542 million bpd, whereas in December it was expected to drop by 29,000 bpd.

Of course, the much-feared U.S. surge is dependent on high market prices, and recently Francisco Blanch, head of commodity markets research at Bank of America Merrill Lynch, joined the growing number of experts who think oil will climb to $70 by mid-2017; similarly, Mehdi Asali, former Iranian director general for OPEC affairs at the Ministry of Petroleum, said, "we can expect $60 or even $70 oil in 2017" if producers make the expected cuts.