News ID: 177469
Published: 0652 GMT February 11, 2017

Oil needs extended OPEC output cuts

Oil needs  extended OPEC output cuts

Organization of the Petroleum Exporting Countries and non-OPEC producers in December reached their first deal since 2001 to curtail oil output jointly, by around 1.8 million barrels per day.

In the months leading up to the deal and after it was struck, OPEC ministers said tackling an overhang in crude and oil product inventories that has depressed oil prices for over two years was one of their main objectives, Reuters wrote.

This contrasts with price hawk Iran, whose Oil Minister Bijan Namdar Zanganeh said OPEC should cut production further in the second half of 2017. Under the deal, Iran was allowed to boost output slightly above October levels.

The International Energy Agency (IEA) said inventories of crude, natural gas liquids and oil products in member countries of the Organization for Economic Cooperation and Development (OECD) remained 286 million barrels above the five-year average of around 2.7 billion barrels. This is despite a draw of 800,000 bpd in the fourth quarter of 2016.

The overhang is almost evenly split between crude and liquids on one side and oil products on the other.

The agency forecasts a stock-draw of 600,000 bpd in the first half of 2017 if compliance with the output deal is maintained at January levels.

"If OECD stocks were to continue to draw in 2017 at the same pace as that seen over July-December, then it would take us around a year to return to the five-year average in stocks," IEA oil analyst Olivier Lejeuene said.

The problem for OPEC is that while high compliance with the agreed production cuts will help to bring down stocks, demand underperformance and rising non-OPEC supplies could temper the effectiveness of the move.

"What it (OPEC and non-OPEC cut) does is basically avoid an even worse surplus than what has been the case in 2015 and the first half of 2016," said David Wech, managing director of consultancy JBC Energy.

"But it does not eliminate (the surplus) in the first half of the year," he added.

Oil supply is expected to grow year-on-year in the first half of 2017 in large non-OPEC producers such as Canada, Brazil and Kazakhstan, BNP Paribas said in a research note this week.

"The key question is the extent of the renaissance of the US shale oil sector, given a continual rise in the rig activity since May 2016 and high hedge ratios for 2017 among producers," the French bank said.

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