Saudi Arabia told Opec it cut production to 9.7 million barrels per day last month, well in excess of its pledged cuts under an agreement hammered out in December and a signal to the oil market of its commitment to the deal.
The monthly report from the Vienna-based producers group said that Saudi Arabia self-reported an average production level for January of 9.7 million bpd, down 718,000 bpd from the previous month and much more than the 10 million bpd rate it agreed to under the deal.
The cut reported by Saudi Arabia’s ministry of energy is greater than that provided by “secondary sources”. Opec also publishes estimates provided by secondary sources, which includes companies that track oil tankers, putting Saudi Arabia’s output last month at just below 10 million bpd. The output deal is based on secondary source numbers.
Both Saudi Arabia and secondary sources reported that the kingdom’s production level in December was 10.4 million bpd and that it had reached record levels in excess of 10.6 million bpd during the third and fourth quarters last year.
Saudi Arabia is the world’s largest exporter and was key to last year’s talks, which resulted in the deal to cut 1.8 million bpd from 11 Opec members – excluding troubled Nigeria and Libya – and another nearly 600,000 bpd from 11 non-Opec countries, led by Russia, the world’s largest producer, which has pledged to cut 300,000 bpd.
The Opec monthly report, which said the group as a whole produced 32 million bpd last month, underlines both Saudi Arabia’s commitment to the deal and the difficulty in tracking compliance.
“By cutting production so sharply in the first month of the agreement, Opec has created a rod for its own back in ensuring production stays this low for the duration of the agreement,” said Ed Bell, the head of commodities research at Emirates NBD in Dubai.
While Opec does not address compliance directly in its report, it agreed with a report last week by the International Energy Agency, the Paris-based energy watchdog, with adherence to the deal at an unprecedented 90 per cent of pledged cuts.
But compliance was patchy, with Saudi Arabia overcommitting and some other countries saying they expect to hit their average production targets over the full six-month period of the deal. This included Russia, which had made only 100,000 bpd of cuts last month, or one-third of their pledge, and the UAE, which is expecting output to fall in March/April when it cuts back for oilfield maintenance.
Analysts agree that the true test – whatever the self-reported or estimates by analysts of compliance – will only fully be borne out by evidence that the glut of oil in storage worldwide is drawing down.
“The critical issue to watch beyond the monthly Opec levels is whether inventories are indeed drawing down,” said Mr Bell.
“It does look like inventories are tighter than they had been for most of 2016, but until we get a far more assured flip of the curve into backwardation, [where prices for prompt delivery of oil are higher than for future delivery] there is still some time to go before we can declare Opec’s production cut a success,” he said.
amcauley@thenational.ae
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