It’s just one month into Opec’s deal to cut production, and this could be as good as it gets for the group’s attempt to rebalance the oil market. Rising output from those not included in the accord and from the US is already undermining the effectiveness of the deal. The prospect of this leakage worsening means we may now be seeing the beginning of the end of the upward march in prices.
When 10 Opec members agreed on 30 November to cut their combined output by around 1.2 million barrels a day, it included an exception for Libya, Nigeria and Iran. So far, those 10 nations have mostly taken much bigger steps towards meeting their obligations than most analysts thought possible. Saudi Arabia has cut output by even more than it pledged. The outlier is Iraq, which has cut supply by only around a quarter of the amount it agreed to.
The effectiveness of these cuts in rebalancing the oil market is being undermined, though, both from within Opec and outside. Rising supply from the three countries excused from the agreement is offsetting the cuts made by the rest, reducing the size of the overall reduction in Opec output to little more than 800,000 barrels a day.
If prices, which have already risen on the promise of cuts, stop increasing, producers may be less willing to toe the line in the coming months. History shows that, after an early burst of enthusiasm, compliance with Opec output cuts typically wanes as time passes. Add to this the prospect of further recovery in production from Libya and Nigeria and some small growth in Iran, and we may see total Opec supply starting to creep back up. That would probably undermine the willingness of the group’s non-Opec friends, such as Russia, to full their part of the bargain.
An even bigger threat to market rebalancing is coming from outside the group. US supply is rising rapidly and is already up more than 400,000 barrels a day since October, according to preliminary weekly data. That is not anywhere near as much as Opec output has fallen over the same period, but it is still a work in progress.
While Opec cuts diminish, the volume produced by the US is likely to keep climbing—and the pace is already faster than during the first shale gale of 2014-15. And that’s before President Donald Trump acts on his America First Energy Plan, aimed at lowering energy costs and “freeing us from dependence on foreign oil”.