Daily Management Review

Analysts see January as ‘The First Big Test’ for OPEC Production Deal


12/31/2016




Analysts see January as ‘The First Big Test’ for OPEC Production Deal
This Sunday will mark the start of the OPEC and non-OPEC landmark deal to cut production by 1.8 million barrels a day in 2017.
 
In order to understand whether everyone will respect the deal, the first month of implementation will be key. However analysts say that full compliance is very unlikely.
 
Alex Dryden, global market strategist at JP Morgan, said that January will be "the first big test."
 
Dryden expects a broad compliance of about 80 percent and doesn't expect 100 percent compliance among OPEC members.
 
The success of the deal could be compromised even further due to the risks related with non-OPEC members, shale gas production, and a stronger dollar.
 
For the first time in eight years, OPEC members pledged to cut production by 1.2 million barrels per day in late November. Promising to cut output by 600,000 barrels per day, some non-OPEC countries, such as Russia, joined their efforts in early December. Their aim is to lift oil prices.
 
"OPEC production cuts will help alleviate the current oversupply, allowing recent price gains to be sustained, and possibly providing momentum for even higher prices," Thomas Watters, global ratings credit analyst at Standard and Poor's, said last week in a note.
 
"But, as higher prices kick in, shale production would likely quickly ramp up, effectively capping oil prices above $60," he added.
 
So far, confirming it will cut production by 95 000 barrels a day as of January 1, is Venezuela, an OPEC-member. Implementing the deal is in its interest given its economic struggles.
 
But countries like Venezuela could be forced to keep production at present levels as the U.S. dollar is likely to strengthen in 2017, according to Dryden from JP Morgan.
 
"A stronger dollar puts pressure (on financial balance sheets for some countries, like Venezuela)," Dryden said.
 
Some countries would be forced to produce more oil to offset the impact on their balance sheets by a stronger dollar as such countries would be more indebted according to economical norms.
 
In all this, analysts view the Russian role as a question mark.
 
Clocking between 200,000 and 210,000 barrels per day, Iraq has also confirmed that it will be reducing output.
 
However, Iraq is prepared to make excuses, Chris Weafer, senior partner at Macro-Advisory, said in a client note last week.
 
"Prior to the November 30th agreement it claimed its actual production to be much higher than the official 4.59 million barrels per day figure. It offered to give up some of the "extra" production," he said, noting that a "full or even partial compliance with that agreement is considered to be very unlikely."
 
Analysts have also described Russia as a “question mark”, a non-OPEC member.
 
He doesn't believe Russia will obey to the commitment, Weafer said in TV interview earlier this month. The deal is "very weak in the detail, in particular the detail concerning the supposed contribution of non-OPEC producers," he had added at that time during the interview.
 
"Even if the government was committed to contributing, it's difficult to see how they would get the companies to do it," Weafer said
 
(Source:www.cnbc.com) 






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