No Surprise From Opec

1 Dec 2017;

To nobody’s surprise, OPEC extended its oil production cuts on November 30.  The original cuts, which were agreed exactly one year ago on November 30, 2016, were for 6 months (January – June 2017) and were subsequently extended for 9 months (through March 2018).  The new agreement will run through the end of 2018.  The volume of the production adjustments remains the same: 1.2 million barrels per day (mb/d) for OPEC members and approximately 600,000 b/d for the participating non-OPEC countries led by Russia (300,000 b/d).  According to the OPEC press release, “the market rebalancing has gathered pace since May, with the OECD stock overhang falling to around 140 million barrels (mb) above the five-year average for October, a drop of almost 140 mb since May.  Moreover, crude in floating storage has also fallen significantly over this period.  Despite this success, the Conference reiterated that it was vital that stock levels be drawn down to normal levels.”  The only real news in the OPEC announcement was that (a) Libya and Nigeria are being brought back into the fold and will be subject to production restrictions, and (b) that OPEC will review the current deal in June 2018 to consider “the opportunity for further adjustment actions”.  OPEC has not (yet) formulated a formal exit strategy, i.e. how to unwind the cuts when they are no longer needed.  In the past, OPEC production quotas would gradually unravel as compliance by member states reduced.  Time will tell if this agreement will be phased out differently.

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