Author: Tom Whipple

For the last month oil prices have been stuck in a trading range in New York of between $52 and $54 a barrel. In London, oil has been trading two or three dollars higher. After a 30 percent jump in the last six weeks of 2016 in response to the OPEC production freeze, prices have stabilized as the markets wait to see the degree of compliance with the pledged production cuts. It may take several months to establish a clear trend as so many nations are involved in the cut. While a few countries, particularly the US, publish oil production and inventory statistics weekly, others do a poor job of collecting statistics. A few release incorrect production numbers they know to be untrue for a variety of political reasons.

Most of the discussion last week focused on the year just past and what 2017 will bring. Oil prices barely moved during the holiday week closing out the year at $53.72 in New York and $56.82. During 2016, however, US futures closed up about 45 percent for the year and London about 52 percent. It was quite the year for the oil industry with prices ranging from $30 to $55 a barrel; the election of fossil-fuel-friendly Donald Trump to the US presidency; and the OPEC/Russia production cut agreement deemed responsible for the record price rebound during the year.

For the last two weeks, oil prices have hovered around $53 a barrel in New York, and a couple of dollars higher in London. Optimism that an agreement among the major oil producers will actually lead to a 1.8 million b/d production cut during 2017 is being balanced off by a stronger dollar, the revival of Libyan and Nigerian oil production, and a steady increase in the US shale-oil rig count.

On Saturday, OPEC and non-OPEC oil exporters agreed to an additional 562,000 b/d non-OPEC production cut in addition to the 1.2 million b/d cut that OPEC agreed on last week. At the meeting, Mexico pledged to cut 100,000 b/d, Azerbaijan 35,000 b/d, Oman 40,000 b/d, and Kazakhstan 20,000 b/d after strong diplomatic pressure was applied. Some analysts expressed doubt as to whether the cuts pledged by Mexico and Azerbaijan are valid reductions as their production was on course to decline by that much anyway next year due to natural depletion. The Kazakh cut, however, was seen as important as the country was due to increase production in 2017 by 160,000 b/d as its giant new oil field came in production.

The agreement between OPEC and Russia came as a surprise for most. Until the Vienna meeting started, there was much pessimism that a deal would be reached and all indications had been that negotiations were deadlocked over the issue of who would cut by how much. The breakthrough seems to have come when Moscow changed its position from “freeze but no production cut” to agreeing to reduce output by 300,000 b/d from the 11.2 million b/d it reached in November. This change, plus the agreement by Baghdad to cut oil production by 210,000 b/d, was enough to convince the Saudis to cut by 486,000 b/d and the other Gulf Arab states would join in for at total Gulf Arab cut of 786,000 b/d. Libya, Nigeria, and Indonesia were left out of the agreement and Tehran was allowed to increase production by 90,000 b/d to 3.8 million – somewhat short of their 4 million b/d goal. Given the bad relations between Riyadh and Tehran, allowing the Iranians to continue increasing production was the toughest part of the deal for the Saudis to swallow.