23 December, 2016
The oil market will move into deficit by an estimated 0.6 million barrels per day (bpd) in the first half of 2017 if OPEC "promptly and fully sticks" to its production target and non-OPEC producers deliver agreed cuts, the International Energy Agency (IEA) has said.
This is "not a forecast but an assumption" based on a 30 November OPEC agreement to cut production and a 10 December agreement by non-OPEC producers, the IEA said.
The OPEC reduction target is assessed at 32.7 million bpd, while non-OPEC producers have agreed cuts of 558 thousand bpd, the IEA said.
"The final report of 2016 analyses events as dramatic as those that kicked off the year. The focus in January was on $30 per barrel oil and the imminent increase in Iranian oil production after sanctions were lifted. In December, we are seeing the first proposed output cut by OPEC since 2008, and the first deal including non-OPEC producers since 2001," the IEA said.
Before the agreements, the IEA's demand and supply numbers had suggested that the market would rebalance by the end of 2017, it said.
The proposed cuts are only for six months, which makes it difficult to predict what will happen in the latter half of the year, the IEA said.
"This can be seen as prudent given the underlying uncertainties in the oil market and the global economy but also a warning that production restraint might not be extended. The price curve reflects this with a sharp increase in short-term prices but shows relatively little movement further out," the IEA said.
"OPEC also appears to be signalling that high-cost producers should not take for granted that they will receive a free ride to higher production.
These high-cost producers, who assume that the cuts at the very least guarantee a floor under prices, might think twice before taking the risk of sanctioning new investments," it said.
Contractual and logistical issues may also cause initial difficulties in implementing the planned cuts, the agency said.
Energy expert Jason Rosychuk of Pinsent Masons, the law firm behind Out-Law.com said: "As always with agreements, the details count and so it should not be taken as a given that the parties will interpret their obligations in the same way as they are reported."
"Additionally, Iran has achieved production at a rate close to that which was predicted prior to the lowering of sanctions through easily accessible oil.
The next stage of increased production from Iran will likely take investment in exploration and development and therefore take several years to materialise," he said.
For further information, please contact:
Ian Laing, Partner, Pinsent Masons
ian.laing@pinsentmasons.com
