The market once again indicates it has a high level of production cuts priced in.
In a repeat of an increasingly familiar pattern, and also further indicating that the market has already priced in a high level of the Organization of the Petroleum Exporting Countries' (OPEC) production cuts, traders on Tuesday responded to news of OPEC's 94 percent compliance rate by causing West Texas Intermediate to settle down 4 cents at $54.01 a barrel and Brent to fall 34 cents to $55.59 per barrel.
A Reuters survey found OPEC has cut its oil output for a second month: supply in February from 11 members has averaged 29.87 million barrels per day (bpd), down from a revised figure of 29.96 million bpd in January and 31.17 million bpd in December.
So far, OPEC has slashed output by 1.098 million bpd of its pledged 1.164 million bpd, which translates into 94 percent compliance.
Gene McGillian, Tradition Energy
Without full compliance by the OPEC cartel and non-OPEC producers....we are positioned for a correction
But the market's reaction gives further credence to critics who say the cuts have already been priced in and is presumably bad news for Saudi Arabia and its Gulf allies who are hoping the cuts will help oil rise to around $60; an OPEC delegate told Reuters, "If compliance is high by OPEC and non-OPEC, then I think prices will reach $60; if it was higher it would be better, but $60 is fine."
Although the United Arab Emirates and Iraq, who are viewed as the members who have contributed the least to the cutback initiative, have pledged to catch up with their targets, there is now considerable worry that anything less than total cooperation by everyone spells disaster.
Gene McGillian, manager of market research at Tradition Energy, told CNBC, "Without full compliance by the OPEC cartel and non-OPEC producers, and signs that demand is picking up, we are positioned for a correction."
He added, "There's a risk that some of the new longs will start to head for the exits, and that's where we could see a correction."
But it remains questionable whether even full-out compliance is enough in an initiative that is widely viewed as removing not nearly enough oil from the market, despite rising demand and certainly in the face of renegade oil producing nations such as Iran and the comeback of U.S. shale.
Indeed, it is forecast that U.S. crude stockpiles, which have been rising for seven consecutive weeks, will experience an eighth build of 2.9 million barrels - which in turn has contributed to crude trading in a narrow $3 range of late compared to the $10 rise it enjoyed when the OPEC agreement was announced in November.
Another factor that could weigh heavily on prices is OPEC delaying the decision on whether to extend its cuts for a full year: Hans van Cleef, senior energy economist at ABN Amro Bank, recently stated that failure to extend the deal could send oil back into the $30s: "If they don't continue with this trend, then the oil price could drop back to where it was two years ago."