Crude Creeps Up as Worries Persist Over OPEC Cutback Compliance

Friday January 6, 2017

Barely one week into the New Year, and the oil market pattern of late December continues: Brent and West Texas Intermediate rose slightly on Friday (the former settling up 21 cents to $57.10 per barrel and the latter settling up 23 cents at $53.99) but a more substantial climb was negated by doubts about the effectiveness of  he cutback deal agreed to by members of the Organization of the Petroleum Exporting Countries  (OPEC) and non members.

Noteworthy is that top crude exporter Saudi Arabia along with Abu Dhabi and Kuwait are showing signs they are indeed abiding by the OPEC agreement: this apparently isn't enough to quash worries that the deal might go south, whether it is via non-compliance or due to the modest cutbacks not being nearly enough to reduce the global oil glut and bring about much-needed market rebalance.

Hans van Cleef, senior energy economist for ABN Amro, echoed the sentiments of many of his colleagues when he told CNBC, "There's a lot of volatility, or at least changes in direction; people think the long-term trend is up, but after a gain of a few dollars, they take profit."

Saudi Aramco has reportedly started talks with customers globally on possible cuts of 3 to 7 percent in February crude loadings; meanwhile, a Kuwaiti oil official told CNBC that his country is reducing production, and a similar report is coming from Abu Dhabi.

But these reports are little more than hearsay, and given OPEC's past track record of not making good on its promises, experts such as Energy Aspects are weighing on the side of caution: "There will be some countries who will cheat ... we expect zero compliance from Baghdad ... And we definitely do not expect the Kurds to join in, given that they are autonomous from the federal government," it stated in its 2017 oil market outlook, published this week.

Another respected onlooker who is treading carefully in predicting what may play out in the near future is Michael Tran, director of energy strategy at RBC Capital Markets; he told Reuters, "Market balances are unquestionably tightening, but concerns pertaining to the pace at which the global storage glut will be drawn down toward historically normal levels will be the focal point for the year ahead.

"While the market has centered its attention on the notional size of the announced cuts from both OPEC and non-OPEC countries and whether or not the group will deliver on its promises, we believe that an important factor is being overlooked ... the deal inadvertently tightens the medium and heavy balances incrementally more than the light, sweet market."

Doubt about the OPEC cutbacks was rekindled earlier this week, when CNBC reported that it is uncertain if Iraq can live up to its 210,000 barrel per day (bpd) reduction commitment in the face of obligations to international oil companies.