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Over to you, Texas

The Opec-non-Opec deal will help prices – but even if everyone complies, it can’t on its own be decisive

Eulogio del Pino, Venezuela’s energy minister, reckons the Opec-non-Opec deal of 10 December shows that “we producers are in control of prices”. It certainly shows they want control. Now they actually have to cut as much as they promised, and hope others – like US Federal Reserve chair Janet Yellen and Texas’s free-spirited oilmen – don’t quickly render Opec’s work redundant.

Prices should enjoy a warm glow, for now. The volumes in the deal are serious: almost 1.8m barrels a day will be taken from supply, starting in January. The market wasn’t expecting even Opec’s own deal to remove 1.16m b/d, announced on 30 November; and certainly didn’t expect non-Opec to cough up another 0.558m b/d. Brent rose by more than 4%, to nearly $57 a barrel, in reaction to the deal.

But caution is necessary. Amrita Sen, chief oil analyst at Energy Aspects, described the agreement on 10 December as “shock and awe”. True – but only if the cutters slash as they said they will. The depth of the cuts will also look much less serious if Nigerian and Libyan supply keep rising. It’s a sorry state when core Opec members are depending on political dysfunction and violence elsewhere in the group for their cuts to work.

Tight oil will also spoil the party if the latest price rally delivers another sharp rise in rigs. In the week after Opec’s November meeting, American producers added 27 to the number – the biggest leap in two and a half years. Thanks to the deal on 10 December, Texan rig-suppliers should have a happier Christmas.

Read the fine print in the non-Opec cuts too. The inclusion of South Sudan, Equatorial Guinea and a host of other small producers will hardly make verification of the cuts easy. Quite how Opec established, for example, South Sudan’s baselines for its cuts is unknown.

Some of the barrels to be “cut” in 2017 were going to be lost to the market anyway. That’s true of Mexico’s involvement, for example. Oman’s contribution, thought to be around 45,000 b/d, will probably also fall into that category. Kazakhstan’s oil minister Kanat Bozumbaev has already said his country’s cuts, thought to be around 20,000 b/d, will be “symbolic”.

Neither Opec nor its new partners have published non-Opec’s country-by-country commitments (we understand the table below, from Bloomberg, reflects that used in the meeting on 10 December). Without one, the market will be left to deduce compliance from the production numbers later in Q1.

Most attention will remain on Russia’s adherence to the 300,000-b/d . Its history of pledging cuts and not delivering them hangs over the whole deal. Vladimir Putin’s imprimatur is on this agreement with Opec, which lends it credibility. But Russia’s energy ministry cannot legally force producers to shutter production. The cuts, if they happen, will be slow, taking place over half a year. Nothing is to stop Russia from slowing production but sustaining high exports, either of crude oil or products.

Saudi Arabia’s messaging about this new deal is confusing too. Oil minister Khalid al-Falih said after the 10 December meeting that the kingdom could cut even more oil from the market than it agreed to in Vienna on 30 November. It was that comment, as much as the non-Opec deal itself, that sparked the rally on 12 December.

But Falih also said in Vienna that the kingdom might lift oil production quickly if the market recovers, perhaps by mid-year. This is a key statement that got much less attention than it warranted. It reveals the tactical, short-term nature of the Saudi approach to these cuts – and the opacity of its strategy.

Above all, the kingdom does not want to surrender market share unless others do so too. That’s been the cornerstone of its position for years. Indeed, it was even willing to cut in November 2014, so long as others did they same. They didn’t, and the kingdom decided to max its output instead.

Don’t think it won’t do so again. In private, senior Gulf Opec sources themselves remain deeply sceptical that Opec members will stick to their quotas; and almost unanimous in their belief that Russia will not live up to its. Some in the Gulf already say, in private, that the Saudi-led decision to revert to cuts was a mistake.

In any event, before this deal really works it must overcome some nearer-term hurdles. The first will arrive on 14 December, when the US Fed is expected to raise interest rates. A stronger dollar will immediately drag on oil prices, and if it causes disruption in emerging-market economies Opec might find its cuts overwhelmed with bearish news before physical markets even start to miss its oil.

Combine that with the hedging from American tight oil producers, a rush to secure rigs before day-rates rise with the oil price and an underlying change in sentiment that promotes more upstream activity, and the price glow from the Opec-non-Opec deal could prove short-lived.

It’s even possible that this Opec-non-Opec deal lives up to its billing, that all the parties to the agreement keep their pledges, and yet the main outcome is a rally-killing rise in tight oil production. Now it’s Texas’s turn to show how it feels about the 10 December deal. Producers might be getting back some control of prices again, as del Pino says. It just might not be the producers he thinks.

Who cuts what: Non-Opec commitments (b/d)

Azerbaijan     35,000

Bahrain     10,000

Brunei     4,000

Equatorial Guinea     12,000

Kazakhstan     20,000

Malaysia     20,000

Mexico     100,000

Oman     45,000

Russia     300,000

South Sudan     8,000

Sudan     4,000

Total     0.558m




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