OPEC countries reduced oil production by 1 million barrels per day (bpd) to 32.06 million bpd in January, which represents 90% compliance with the agreed production cut, the International Energy Agency said in its monthly Oil Market Report.
Initially, there was widespread scepticism that all producers would actually make the promised cuts, but compliance with the announced reductions is now estimated to be between 80 and 90 percent as OPEC's de-facto leader Saudi Arabia has enforced deep production cuts.
For non-OPEC countries, outside of the output deal, the IEA says it expects significant increases in production in, for example, Brazil, Canada and the U.S. whose combined output is expected to grow by 750 kb/d in 2017. Hedge funds and other investors have clearly overbought, the EIA expects shale to boom back to 9.5 million barrels per day (mbd) in 2018, USA stocks rose by a massive 14 million barrels last week, and OPEC producers not bound by quota (Libya and Nigeria) are pumping more volumes.
While industrialized nations' stockpiles have dropped for the past five months, and fell during the final quarter of 2016 by more than any other time in three years, they are still significantly higher than average levels.
The price of USA crude oil futures spiked 1% to trade at $53.50 a barrel after the report. Other global producers have agreed to cut output by 558,000 bpd with Russian Federation agreeing to slash 300,000 bpd. Non-OPEC members Russia, Oman and Mexico agreed to shave 558,000 bpd off their production.
This includes about 300 million barrels from the OECD and 100 million barrels from non-OECD. A rally surfaced midweek on signs of market balance.
Brent was on track for its first weekly drop in four weeks while USA crude headed for its fourth straight week of gains.
We remain very bullish oil prices and believe we could see $70 WTI by Q3 2017.
Coupled with the IEA's 100,000-barrel per day upward revision to demand increase expectations to 1.4 million barrels, the Paris-based watchdog's data should have a positive impact on the oil markets, both domestic and global. This could hit hard the revenues of oil producers of the gulf and many other countries besides creating unfavourable platform of lower oil prices to Saudi Aramco for valuation of its IPO, scheduled in 2018. "This proves that they are serious about supporting the price of oil".
Elsewhere in its latest market update, the IEA also predicted that world oil inventories will fall by 600,000 bpd over the first half of the year if Opec sticks to its agreement.
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