Saudi Compliance on Cutback Deal Means Opportunities for Rival Iran and Other Producers

Saudi Arabia is reported to have cut oil output in January by at least 486,000 bpd

On one hand, reports that Saudi Arabia is complying with the cutback deal agreed to by members of the Organization of the Petroleum Exporting Countries (OPEC), along with data showing OPEC output falling in December, may be a welcome surprise to critics; on the other, it is helping to make true another prediction: that rival members will take advantage of any market gaps for their own benefit.

A Gulf source familiar with Saudi oil policy told CNBC that the kingdom cut oil output in January by at least 486,000 barrels per day (bpd) to 10.058 million bpd – which, if true, is in full compliance with the OPEC agreement.

Also, Saudi Aramco has started talks with customers globally on possible cuts of 3 percent to 7 percent in February crude loadings.

Meanwhile, a Reuters survey based on shipping data and information from industry sources shows that supply from OPEC in December fell to 34.18 million bpd from a revised 34.38 million bpd in November.

However, in a cartel comprised of bitter rivals, this does not necessary herald smooth sailing ahead: the Reuters survey notes that output climbed in Iraq, with exports from the country's south most likely exceeding November's record rate of 3.407 million bpd; the survey also cited Libya as having the largest output increase of all, of 70,000 bpd, due to a two-year blockade being lifted in December.

As for Iran, which refused to go along with the cutback deal, it pumped 30,000 bpd more in December, according to the survey.

Additionally, industry sources told Reuters that Iran has sold more than 13 million barrels of oil that it had long held on tankers at sea, in essence taking advantage of the cutbacks in its effort to court new buyers and fully reestablish itself on the international market.

Mehdi Varzi, an independent global industry consultant, remarked, "Iran got its way at OPEC and the Saudis agreed not to limit their capabilities; Iran will go ahead and look to export whatever they can for winter demand (globally)."

As for the bigger picture of the global market, Bjarne Schieldrop, chief commodities analyst at SEB, stated, "We are not necessarily set for an immediate price take-off: one problem is the very high OPEC production in fourth-quarter 2016.

"The still-rising crude oil production in Libya is also creating concerns that OPEC's cuts might be less effective."

The outcome of some countries cutting while others pump full-out is unclear, but the phenomenon seems to be lending credence to recent predictions that far from oil rebounding to past highs of $100, it will experience more modest gains: this was the contention last week of Deloitte, which believes $55 will be the norm in 2017.