Culled—Proshare

December 13, 2016/Meristem Research

Shortly after OPEC members agreed to cut production by 1.2MMbpd, representatives of OPEC and Non-OPEC member countries met at Vienna over the weekend, Saturday 10th December 2016, to discuss the prevailing challenges facing the industry and reached an agreement on further production cut from Non-OPEC member countries.

The successful meeting had 11 Non-OPEC members (Azerbaijan, Kingdom of Bahrain, Brunei Darussalam, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Sultanate of Oman, the Russian Federation, Republic of Sudan and Republic of South Sudan) in attendance.

They agreed to join in the output cut by pledging a joint reduced target of 558,000bpd from current levels, effective 1st January 2017. The total production cut (OPEC & Non-OPEC league) has therefore been put at c.1.8MMbpd.

Russia, the largest Non-OPEC producer, agreed to cut output by c.300,000bpd, while some other members agreed to cut production as follows; Mexico (100,000 bpd), Azerbaijan (35,000 bpd), Oman (40,000 bpd) and Kazakhstan (20,000 bpd).

According to OPEC, the non-cartel members agreed this reduction will be carried out either voluntarily or through a managed decline, in accordance with an accelerated schedule.

The outcome of this decision, being its first since 2001, drove Crude Oil price to a-17 month high of USD56.65pb over the weekend, as oil speculators continue to take positions in anticipation of the “would-be” significant rally in crude oil prices.

The question still remains whether this deal would be sustainable enough to effectively stabilize the industry or better still, cause a resurgence to the previous levels prior to the distortion by US Shale Oil in 2014.

Given that US Shale Oil production still remains less than 4 million barrels as opposed to its peak of 4.6mmbpd in 2015, we posit that any significant increase in the price of crude oil, may create an opportunity for Shale Oil production to thrive, hence, moderating the efficacy of this decision.