Crude oil prices plummeted from more than US$110 per barrel in the second quarter of 2014 to just above US$26 per barrel in the first quarter of 2016. This was due to massive supply additions by tight oil producers followed by ramp-ups by major producer-countries such as Saudi Arabia and Russia. The global crude oil imbalance ─ excess of supply over demand ─ exceeded a staggering 2 million barrels per day (bpd) by the second quarter of 2015, exerting downward pressures on prices. Market speculations about the necessary trigger for a global rebalancing grew rife. Large supply outages early last year, which bore such ascription proved false.
With proceeds buffeted by a protracted low-price regime, major oil-producing countries ─ excluding the United States ─ agreed late last year to cut production, effective January 2017 and rein-in the supply overhang. The agreement provided for a total supply cut of 1.8 million bpd for the first six months of 2017 with the option of a rollover for a further six months. The Organization of the Petroleum Exporting Countries, OPEC ─ excluding Nigeria and Libya, both of which had and still have issues of domestic unrest ─ agreed to a supply cut of 1.2 million bpd while for the eleven non-OPEC countries, the agreed cut was 600,000 bpd.
For both investors and analysts alike, three issues underscore concerns about the accord’s capacity to rebalance the global oil market:
First, a record of breaches of assigned production quotas among OPEC members; second, the lack of an effective mechanism for enforcement of such production quotas; and finally, the effect on prices, of rebounding production, especially among the nimbler United States shale producers.
It is really no secret that some OPEC countries have often violated their production quotas with little or no effective sanctions applied. A report by World Oil for example, showed that even with a supply reduction agreement in place, crude oil shipments by OPEC member Iraq, increased during the first 15 days of February by 122,000 bpd over the average for January. While this could be counterbalanced by reductions in subsequent months, it only accentuates concerns about compliance.
However, due perhaps to the magnitude of the afore-mentioned slump in proceeds, the compliance rate for OPEC under that November accord was high for the first month. Per a report by Argus, the group reduced output by 1.14 million bpd out of the agreed target of 1.17 million bpd (a 97% compliance rate) between December 2016 and January 2017; Saudi Arabia exceeded its agreed reduction quota by 16%. For non-OPEC members, that rate was less than 50%. That said, whether a significant compliance rate among the groups can be sustained, remains to be seen.