OPEC agreement to accelerate market rebalancing – BMO CM

Earl Sweet, Senior Economist at BMO Capital Markets, notes that the OPEC agreed to cap its production of crude oil at 32.5 million barrels per day (mmb/d), the lower end of the 32.5-to-33.0 mmb/d range discussed in Algiers in September and 1.2 mmb/d below recent output levels.

Key Quotes

“Earlier differences of opinion among Saudi Arabia, Iraq, and Iran about participation rates and output measures apparently have been overcome by Saudi flexibility in accepting a larger portion of the cut. There were also indications that discussions with other major non-OPEC producers, primarily Russia, would lead to additional output cuts of 0.6 mmb/d.” 

“The agreement is intended to last for a trial period of six months and, if adhered to, would accelerate the process of oil market rebalancing that is underway. Global demand is already rising more quickly than supply and would likely catch the latter by around mid-2017, even without an agreement. If the agreement holds, demand would surpass supply by as early as the first quarter of 2017, though the drain on inventories would likely be moderate during the first half. If the production cap were extended, the inventory draw would accelerate notably during the second half when demand increases more quickly. Even in the absence of actual cuts by Russia, or assuming that an upturn in U.S. output offsets any cuts by Russia, the OPEC agreement, if held throughout 2017, would drain global inventories by around 350 million barrels. While oil prices have rallied on this news, sustainability and further gains will depend on the market’s assessment of compliance to the agreement.”