OPEC in Output Cut Talks With Wider Non-Member Producers, but Analysts Remain Skeptical

Tuesday December 6, 2016

Now that the Organization of the Petroleum Exporting Countries (OPEC) has pulled off an unexpected win by achieving cutback ratification, it is heading back to Vienna this week to convince 14 other crude producing nations to reduce their output as well – but the market displayed its skepticism on Monday with Brent retreating to $54.22 per barrel (from $54.94 earlier in the day) and West Texas Intermediate falling to $51.11 per barrel (from $51.79 earlier).

The potential halt to a rally that saw an 18 percent price rise since OPEC's surprise agreement last week was explained by Tim Evans, energy futures specialist with Citigroup, who told Reuters, "We remain skeptical that non-OPEC producers will line up to pledge their own reductions when OPEC's announcement last week already largely took responsibility for rebalancing the market.

"In our view, the rally in prices represents an economic call for more production, not more cuts."

Mohammad Barkindo, secretary-general for OPEC, said major producers to the December 10 meeting in the Austrian capital may include powerhouses Mexico and Kazakhstan, along with minor players such as Bolivia and Uzbekistan; other countries include, in descending order of production importance, Colombia; Oman; Azerbaijan; Egypt; and Congo.

Accompanying the doubt that these nations will agree to some form of output reduction is a resurgence of sentiment that Russia, which pledged to reduce output by 300,000 barrels per day for the first half of next year, will follow through on its promise: "We remain quite skeptical that this will actually happen," JBC Energy GmbH said in a note.

Chris Weafer, senior partner at Macro-Advisory, is even more certain of Russia's non-compliance: when asked by CNBC if the nation will back the OPEC initiative, he replied,  "No, I don't think so at all."

He added, "even if the government was committed to contributing, it's difficult to see how they would get the companies to do it. It's not like an OPEC structure" – referring to OPEC countries that usually have a state firm obeying government directions on oil production, compared to the companies in Russia involving private investors.

Meanwhile, other analysts studying Monday's market offer another reason for the slight drop in prices: "The Brent-WTI spread has blown out, and a lot of that has to do not only with shale but with the idea that there would be more drilling," said Tariq Zahir, managing member of Tyche Capital Advisors.

Zahir' concerns are echoed by Stewart Glickman, head of energy research at S&P Capital IQ, who told media immediately after the OPEC ratification was announced that the challenge moving forward will be two-fold: "First we will be looking to see what compliance will be, and then we'll have to see if U.S. producers step up and fill the gap left by the cut; U.S. producers have become a lot more efficient over the past two years. "